CHAPTER IV
CONCEPTUAL MODEL
A Combined Retail Evolution model was developed for this study in fulfillment of
Objectives 1 and 2. The Combined Retail Evolution model was developed from previous retail
evolution theories (i.e., the conceptual and empirical literature reviewed in Chapter II), which
provided detailed information about retail change and fragmented information about consumer
change. No single retail evolution theory explained all types of retail evolutions, and limitations
were recognized with all the models (Brown, 1987; Davidson, 1970; Gist, 1968; Hirschman,
1979; Kaynak, 1979; Oren, 1989). The need for a more comprehensive model was stated by
several researchers (Brown, 1988; Brown, 1990; Dressmann, 1968; Thomas, Anderson & Jolson,
1973); therefore, researchers have continuously studied to gather information for developing the
best theoretical model for all retail evolution. The model of this study synthesized previous retail
evolution theories for a better fit to all types of retail evolutions, in addition to providing a basis
for future study of nonwestern retailing situations. Using grounded theory techniques of
decontextualization and recontextualization, the researcher in this chapter explains the proposed
model and provides a variable-based review of the literature, giving support for the formation of
each aspect of the model.
Combined Retail Evolution Model
The three, most commonly used, retail evolution theories are the Cyclical theory, the
Conflict theory and the Environmental theory. These three theories provide the foundation for
the three following major principles or themes used in the development of the Combined Retail
Evolution Model (CREM) (see Figure 4.1): (a) rhythmical patterns of spiral change, (b) the
effects of conflict or challenge from competition, and (c) the influence of retail environments.
The Cyclical theory states that retail institutions evolve in a rhythmical pattern (e.g., low-high-
low price cycle, general-specific-general assortment cycle) (e.g., Hollander, 1966; McNair,
1958). McNair designated these cycles with three phases, which are entry (or introduction),
trade-up (or mature) and vulnerable phases. The Conflict theory states that an existing retail
institution
46
R1 = retail institution types
R1 R2
R4 R5
R6
Environmental influences
Consumer’s preference of store/product attributes
Environmental influences
Consumer’s preference of store/product attributes
Shopping orientation
Demographics Product Situation
Shopping orientation
Demographics Product Situation
R3 First Wheel Second Wheel
Retail Evolution Influences
Figure 4.1. Combined Retail Evolution Model
47
(i.e., the thesis) is challenged by its competitor (i.e., the antithesis). As time passes, the retail
institution and the competitor blend together, upgrade their attributes, and finally create a new
retail institution (i.e., the synthesis) (e.g., Gist, 1968; Oren, 1989). The Environmental theory
states that retail environment is a key influence to retail change. To survive or continue in
operation, retail institutions need to evolve by adapting or adjusting to the changes in the retail
environment (e.g., changes of consumers, economy, technology, society, culture or geography,
legal, competitors), or be forced out of business (e.g., Blizzard, 1976; Brown, 1987). The CREM
model combines aspects of these evolution theories and shows retail institution types in a change
process.
Patterns of Spiral Change and Conflict
Developed from a synthesis of the Cyclical theory and the Conflict theory, the Retail
Evolution process (see the Retail Evolution portion of Figure 4.1) shows the cyclic change of
retail institution types in a progression from “R1” to “R6”. As grounded in the Cyclical theory,
the process starts with the “R1” type of retail institution type, which is evolving cyclically within
the institution type but not returning to the same starting position (i.e., a spiral wheel). As time
passes, this retail institution type enters the trade-up (or mature) phase. In this phase, sales are
rising indicating the growing attraction that this institution type has for consumers. With more
time, operational costs start rising and prices increase accordingly. This institution type enters
the vulnerable phase. At this point, profit is expected to drop, and market share is expected to
shrink. With rising costs and falling market share and profit, the institution type becomes
vulnerable to its competitors, and this vulnerability provides a vacuum for an emergence of a
new retail institution type. The spiral change is a combined format from the Wheel of Retailing
theory and Environmental theory, which was proposed by Agergaard, Olsen and Allpass (1970),
indicating that a retail institution returns to a higher level of position, as the surrounding
environments (e.g., living standard) evolve, along with the retail evolution. A higher-level
position for a retail institution could be indicated by the implementation of more advanced
operating systems, more store facilities, or increased automation of supply chain activities. All
other retail institution types that exist at this time are also changing in a spiral evolution, as
shown with “R2” and “R3”.
48
Using the explanation of change as proposed in the Conflict theory in conjunction with
the spiral movements proposed from the Cyclical theory, the “R1” retail institution type, while
spiraling, conflicts with “R2” type of retail institution type. This conflict is proposed by Gist
(1968), showing that an existing retail institution (i.e., thesis1) is challenged by its competitor
(i.e., antithesis1). Providing further support for this conflict and change are the ideas from Izraeli
(1973), who proposed the Three Wheels of Retailing theory, indicating that three different retail
institution types conflict each other, while they are evolving within their own wheel. Therefore,
in this CREM, the possibility of conflict among three or more existing retail institution types
(e.g., a third or “R3” type of retail institution) is included. In the CREM, a new retail institution
type can be created by the conflict between two or among three or more retail institution types.
As a result of this conflict, a new modified retail institution type is created (i.e., “R4” type of
retail institution).
The part of the CREM, showing multiple retail institution types that are cyclically
evolving and conflicting with each other, is similar to the concept of the combined theory (e.g.,
Izraeli, 1973), but in the CREM, the theme of spiral evolution, instead of the simple cyclic
change included in the previous combined theories, is added to cover more types of retail
evolution change. In addition, in the previous combined theories, the possibility of a conflict
among three or more existing retail institution types (e.g., “R3”) was rarely discussed. Even
though Izraeli (1973) proposed the conflict among three different institution types, most
combined theories, proposed by several other authors, did not include this aspect.
As time passes in the Retail Evolution process of the CREM, a new “R4” type of retail
institution starts its cyclical evolution within its institution type and cycles to a higher level (e.g.,
matures by obtaining more advanced operating systems, more store facilities) than the one before
the wheel occurred. The Retail Evolution process of the CREM is evolutionary and repetitive
(see Figure 4.1). With more time, the cycling “R4” type institution ages and becomes an
established retail institution type and conflicts with “R5” type institution (i.e., a new retail
institution type), and additional existing types of retail institutions (e.g., “R1”, “R2”, “R3”). The
work of Gist (1968) provides grounding for this conflict between an existing retail institution
type and a newly emerged competitor, and information from the work of Israeli (1973) supports
the concept of a conflict among two or more existing retail institution types. This conflict
provides the impetus for a new “R6” type institution. This portion of the model now portrays a
49
more complex retail evolution path than is portrayed in previous literature, and should be able to
provide an improved framework for studying the increasingly complex array of retail institution
types.
Environmental and Consumer Influences
During the transition to and creation of a new retail institution type (i.e., the Retail
Evolution process in the CREM), environmental influences and changing consumers’
preferences toward store/product attributes (see the Influences portion of Figure 4.1) influence
the emergence of a new retail institution type. The Influences portion of the model is grounded in
information about the retail environment from the Environmental theory literature and
consumers’ shopping behavior literature. Environmental influences include but are not limited to
social, cultural or geographical, technological, legal and economical conditions (e.g., Blizzard,
1976; Brown, 1987; Kaynak, 1979). These environmental influences significantly affected retail
evolution, according to the previous researchers.
The consumer variable, which was previously included within the environmental
influences in the Environmental theory, is separated from the environmental influences, in this
study and in the CREM. This separation in the model shows consumers as one of the major and
interactive influences in the retail change process, not simply another of the numerous
environmental influences. Some writers on Environmental theory even avoid the mention of the
consumer (e.g., Blizzard, 1976). Although many previous researchers do not clearly define
consumers’ roles in the retail change process (e.g., Gist, 1968; McNair, 1958), this distinction is
made in the CREM because of the differences, conflicts, and interactions among consumers, the
other environmental influences, and the retail institution types. According to Sheth (1983) and
MacNair and May (1978), a consumer’s needs for a certain type of retail institution are affected
by environmental influences such as economy, technology, and social configuration. Using that
explanation, a consumer’s preference for store/product attributes and the associated
environmental influences are proposed in the CREM to have a cause and effect relationship.
Another reason to separate consumers from the other environmental influences is the
increasing importance of consumers in the retail environments. Support for this aspect of the
model comes from the findings that changing consumers’ preferences for store/product attributes
50
may directly affect retail evolutions (Arnold, Handelman & Tigert, 1998; Monroe & Guiltinan,
1975). Another aspect of the consumer influence, added within the Influences portion of the
CREM, is the reciprocal effect of the retail to consumer relationship. This aspect is included
because previous research shows that a new retail institution might initiate consumer changes in
preference for store/product attributes. Carpenter & Nakamoto (1989) examined the forming
procedure of consumers’ preference for a new or pioneer product. They found that consumers’
preference for attributes of a new or pioneer product affected their preference for other products
in a same category, which showed the possibility that new store/product attributes (i.e., a new
retail institution type in the CREM) might affect consumers’ existing preference. Therefore, the
influence from “R4” to consumers’ preference for store/product attributes is included in the
CREM (i.e., “R4” → Consumers’ preference). This direction of influence has not been proposed
in the previous combined retail evolution theories, which generally include a consumer variable
within the environmental influences that affects retail evolution (i.e., Consumers’ preference →
“R4”).
The variable of the consumer, or more specifically the consumer’s preference for
store/product attributes, is, in itself, a complex process with additional influential forces. The
consumer variable in the CREM is expanded beyond what is discussed in many retail evolution
theory articles. Authors (e.g., Gist, 1968; Kaynak, 1979; McNair, 1958; MacNair & May, 1978)
described consumers as simply a part of changing retail environments and did not discuss what
might influence consumers’ changes and how these consumers’ changes might affect retail
evolution. According to previous articles about Environmental theory and other retail and
consumer behavior research, a consumer’s preference for store/product attributes is influenced
by his/her shopping orientations, and, in turn, a consumer’s shopping orientations is affected by
his/her demographics (e.g., Kim & Chen-Yu, 2003; Monroe & Giltinan, 1975; Sheth, 1983;
Shim & Kotsiopulos, 1992).
According to several authors in both theoretical and empirical work (e.g., Chen-Yu,
Williams, & Kincade, 1999; Engle, Blackwell & Miniard, 1995; Moye & Kincade, 2002), the
consumer’s situation, which is a personal environmental influence, also influences preference for
store/product attributes. The variable of situations in previous literature has been described as
mood, information, location, time, usage (i.e., formal, casual, gift), and whether the product is for
self or other (e.g., Engle, Blackwell & Miniard; Moye & Kincade; Sheth). Many previous
51
researchers describe a consumer’s situation as a direct influence on his/her preference for
store/product attributes; however, this study proposes an indirect relationship between the two
variables. The relationship is intervened with a consumer’s shopping orientation, which is
assumed to change depending on the situations. Grounded support for this more complex and
indirect relationship is provided in Sheth’s model (1983). In Sheth’s model, product types were
proposed to affect consumers’ shopping orientations, which influenced consumers’ preference
for store/product attributes. Sheth also noted that product determinants including product
characteristics and usage situations influence consumers’ shopping orientations. In turn,
consumers’ shopping orientations affected their retail institution type selection by determining
their preference for store/product attributes. Using Sheth’s proposed structure, in this study and
in the CREM, a consumer’s situations and product types are assumed, therefore, to affect
changes in his/her shopping orientation. In turn, a consumer’s shopping orientation influences
his/her preference for store/product attributes.
In summary, according to previous consumer behavior studies, all of these consumer
related variables (i.e., shopping orientation, demographics, product, situation) and the associated
relationships affect consumers’ retail institution type selection (i.e., store patronage). These
findings provide grounding for the CREM, and indicate that these variables might affect
consumers’ selection of a new retail institution type as well, which in turn, may affect or enhance
retail evolution. Therefore, these relationships, which have not been discussed in any previous
retail evolution theory, but have been highlighted in some literature on consumers’ shopping
behavior, are included in the CREM.
In addition, previous consumer and retail research (e.g., Engel, Blackwell, & Miniard,
1995; Kaynak, 1979) recognize that many of these variables do differ across countries.
Numerous cross-cultural studies in consumer research recognize the difference in consumer
behaviors within differing cultures. For these reasons, geographic and cultural differences or
specifics may also have an influence on the retail evolution process.
52
CHAPTER V
RESULTS AND DISCUSSION
Various retail institution types that have emerged and evolved in Western countries,
including department stores and discount stores, were imported to South Korea and adjusted
appropriately to the South Korean environments within a compressed time period (Kim, 1999).
For this reason, evolution of retail institution types in South Korea is difficult to explain with
current retail evolution theories (Ok & Kim, 1997). During the review of literature search, no
research was found that studied the historical retail institution evolution in South Korea with any
of the three main retail evolution theories (i.e., Environmental, Cyclical, Conflict theories);
however, articles were found that reported where previous researchers have studied and
explained influences on the lifecycle of retail institution types (i.e., growth, maturity, decline)
after the importation. This information contributes to the explanation of the retail evolution in
South Korea.
This chapter explains the evolution of retail institution types in South Korea, through the
model of Combined Retail Evolution (CREM) as proposed with the modified ground theory
method in the previous chapter. The chapter, thereby, addresses Objective 3 and Research
Question 1: How have South Korean retail institutions evolved, including the emergence of the
new retail institution in South Korea. The three major representatives among the retail institution
types in South Korea were examined. These types are department stores, discount stores, and
Private-Branded Hive type store (PBH).
Evolution of Retail Institution Types in South Korea
In South Korea, R1 and R2, as noted in the CREM (see Figure 4.1), represent department
stores and discount stores. Historically, department stores were imported earlier than discount
stores; however, these two retail institution types both became major retail institution types in
South Korea within a short time. Over time as diagramed in Figure 4.1, department stores and
discount stores are evolving within their retail institution types. Evidence is available that
supports the fact that they became strong competitors to each other and conflicted in terms of
their store/product attributes. As designated in the CREM, a new retail institution type was
53
created from this conflict (i.e., PBH). In this chapter, the background, a cyclical evolution
process, environmental influences, consumer influence, and the overall spiral evolution of each
retail institution type (i.e., department stores, discount stores, and PBH) will be explained
separately. In addition, the conflict between these two types of stores will be explained and
finally, a new retail institution type (PBH) will be introduced.
Department Stores in South Korea
Background
During Japan’s colonial period (1910-1945), a Japanese-style department store was
imported to South Korea (Lee, 1996), so that as early as the 1930s, the first department store
opened in Seoul, South Korea. However, as recently as the 1960s, small traditional “street”
stores continued to be plentiful in South Korea (Hwang & Jung, 1993). A street store is a small
general store located in a neighborhood, carrying various products for daily life. This store type
is an early, smaller version of the current convenience store, and a number of street stores were
often densely located within a district.
In the 1970s, conglomerchants started opening Western-style department stores with
modern environments and advanced operation systems (Lee, 1996; Ok & Kim, 1997). Since
then, South Korean department stores evolved and formed unique characteristics, which differ
from those in Western countries, to serve South Korean consumers. One primary difference is
that most South Korean department stores do not purchase products from manufacturers but
instead lease spaces to manufacturers (Lee, 2000); therefore, inventories within the store are
owned by manufacturers (Cha, 1998). For this reason, department stores do not have power or
control in product planning and price decisions. All product-related marketing and management
activities are under the manufacturers’ control. Another difference is that department stores carry
a food category, which accounts for 17% of total sales (Kim, 1999). Department stores provide
high quality domestic food products and imported food products. Lastly, most retail institution
types in South Korea, including department stores, are located in central business districts (Cha,
1998). Major, fashion-oriented shopping malls, the U.S. location for most U.S. department
stores, have not yet been introduced into South Korea. Department stores are located primarily in
central business districts to reach consumers, who are accustomed to shopping and doing social
54
activities in a central business district, with the convenience of close proximity to all retail
institution types (Jang, 2000).
Cyclical Evolution of Department Stores
According to the Cyclical theory, which was part of the foundation for the CREM, an
innovative retail institution starts in its growth phase with limited product lines, low prices, and
minimum services; however, this aspect of the Cyclical theory appears not to be applicable to
South Korean retailing. Department stores in South Korea were imported and positioned initially
(i.e., their entry phase) as a high-end retailer, providing high price and high margin products. In
review of its background, this retail institution type seems not to have evolved from the large
general store as found in the United States nor from the small “street stores” of South Korea;
instead, the evolution of department stores in South Korea seems to start from the second phase
of the cyclical evolution (i.e., trade-up or mature phase). According to Levy and Weitz (2001)
and McNair (1958), an institution type enters the trade-up phase as time passes, as the innovative
retail institution offers more services (e.g., more variety in products, advertisements, delivery,
and provision of credit) and better store characteristics (e.g., rest rooms, carts, wide aisles, food
courts and resting areas). With entrance into the trade-up phase, an innovative retail institution
achieves high sales volume, profitability and market share due to improvement of its store retail
mix, and becomes a traditional or mature retail institution. Due to this successful operation,
many new stores imitating these upgraded operations open for business. Many researchers agree
that department stores have been a very successful retail institution in South Korea; however,
whether this success of department stores followed the steps of the Cyclical theory or some other
evolutionary process has not been previously discussed. In the following paragraphs using the
constant comparative analysis method, the operations and other retail history of South Korean
department stores are analyzed based on the retail evolution process proposed in the CREM.
A number of factors can be examined to indicate the success of a specific retail business
or of a general retail institution type. Success can be measured by growth of sales, market share,
profit, increase in number of individual units, and expansion in size of square footage (Gist,
1968; McNair, 1958). These variables are examined in the following section to analyze the
evolution of the department store and compare the changes to the predictions in the CREM.
From the 1980s to the mid 1990s, department stores were the major retail institution in South
55
Korea, as indicated by significant sales increases, with total sales increasing by 246 % between
1987 and 1991 (“South Korea,” 1995). Until the mid 1990s, the growth rate of sales was an
average of 20% every year (Lee, 1997). In 1993, total sales of department stores were seven
trillion won (about $6 billion), and ten trillion won (about $ 8.5 billion) in 1995 (Jeong, 2000). In
addition, the dominance of the department store, in the late 1980s and early 1990s, can be seen in
the comparison of the market share for that retail institution type (Pak, 1998). The department
store sales volume was 14.2% of total retail sales, while that of supermarkets remained at 3.8%
and that of discount stores remained at 1.3%.
As department stores were successful as a retail institution (e.g., increased sales and
market share), the numbers of stores were rapidly increased. Retail businesses expand the
number of doors or outlets when the business is profitable and sales are increasing (Kincade,
Gibson, & Woodard, 2004; Levy & Weitz, 2001). At the beginning of the 1980s, the number of
department stores had grown by 140% from their introduction in the 1970s (“South Korea,”
1995). According to The Statistic Resource of Distribution Industry and The Report for Retail
Operation and Trend, the number continuously increased except in 1988 (see Table 5.1 and
Figure 5.1). (More discussion on this growth is provised in the next paragraph.) These large sales
growths and increasing numbers of stores were expected in the CREM, which is based on the
Cyclical theory proposed by McNair (1958).
The global measures for the institution type showed rapid, successful growth of the retail
institution type of the department store; however, sales per store showed a different trend. The
increase in sales per store did not coincide with the continued maturation of a retailer as the
CREM proposed. The sales volume per store increased until 1988 (see Table 5.2 and Figure 5.2).
The average sales per store actually dropped during 1988 and 1989, and then rapidly increase in
the following period, with additional peaks and valleys. Such a drop in per store sales can be
hidden in total sales in a retail institution type that has growth in stores as well as growth in total
sales. However, the number of stores dropped during this period also.
56
Table 5.1. Number of Department Stores in South Korea1
Year Number of Stores 1969 3 1979 17 1983 13 1984 29 1987 45 1988 22 1989 53 1991 86 1993 92 1994 95 1995 98 1997 99 1999 109 2001 103
Number of Department Stores
0
20
40
60
80
100
120
1969 1979 1983 1984 1987 1988 1989 1991 1993 1994 1995 1997 1999 2001
Year
Num
ber
Note: Data from 1970 to 1987 are not continuous.
Figure 5.1. Number of Department Store2
1 The report for retail operation and trend, 1970~2001; The yearbook of distribution industry, 1984, 1998, 2002 2 The report for retail operation and trend, 1970~2001; The yearbook of distribution industry, 1984, 1998, 2002
57
Table 5.2. Sales Per Store3
Year Sales per store (W million)
Consumer Price Index (Year 2000 Base)
Sales per store based on CPI
1982 10,785 51 21,146 1983 14,878 53 28,072 1984 32,624 54 60,415 1985 33,417 53 63,051 1986 44,249 54 81,943 1987 58,962 56 105,290 1988 45,026 61 73,814 1989 44,880 69 65,043 1990 62,875 75 83,834 1991 78,173 79 98,953 1992 90,892 84 108,205 1993 86,093 87 98,958 1994 106,000 89 119,101 1995 120,400 90 133,778 1996 127,200 91 139,780 1997 122,100 93 131,290 1998 112,600 97 116,082 1999 141,000 98 143,878 2000 169,300 100 169,300 2001 195,500 103 184,434
3 CPI calculation, 2003; The report for retail operation and trend, 1983~2001; The yearbook of distribution industry, 2002
58
Sales Per Store
0.00
50,000.00
100,000.00
150,000.00
200,000.00
250,000.00
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
Sale
s (W
mill
ion)
Sales Per Store Sales Per Store/CPI
Figure 5.2. Sales Per Store without and with the Consumer Price Index Adjustment4
Multiple environmental factors could be the reasons for the drop in sales. For example, a
nation-wide cultural event in 1988 (i.e., 88 Olympics in South Korea) could have negatively
affected retail activities due to the national focus of financial support for the Olympics and the
financial downturn effects of post-Olympics. Additional explanations of environmental factors
that influenced evolution of department stores will be supplied in the next section on
environmental influences. According to the CREM, with fewer stores and with more time, sales
per store were supposed to increase due to less competition. However, even though the number
of department stores decreased in 1988 (1987-45, 1988-22), the sales per store decreased as well.
This result indicates that environmental events influence the evolution process of department
stores. According to the CREM, environmental influences were the primary base of the
emergence of a new retail institution type, but the data show that changing environments
continuously influence the evolution of a retail institution after its emergence.
4 The report for retail operation and trend, 1983~2001; The yearbook of distribution industry, 2002
59
In 1993, another fluctuation is observed in the data (i.e., 1992-W90,292 million vs.
1993-W86,093million). This change also indicates some environmental (e.g., social/political)
event/s happened and affected sales in department stores (see next section for additional
environmental explanations). After 1993, even though the number of department stores kept
increasing (1993-92; 1994-95; 1995-98), sales per store were also increasing, which means that
generally all department stores had a significant sales success regardless of increasing
competition. However, during 1997 and 1998, the sales per store decreased again due to an
economic crisis (i.e., 1997-W122,100million vs. 1998-W112,600million). In addition, the
increasing number of department stores regardless of the economic crisis (1997-99; 1999-109),
and the increasing number of competitors (i.e., discount stores) are assumed to affect the
decreasing sales volume per store.
To adjust for inflation in the statistics in sales per store and to provide a more accurate
trend in sales, sales per store were recalculated with Consumer Price Index (CPI), which is the
most common index that indicates inflation over time (CPI Calculation, 2003). The equation
used for conversion from sales volume to sales volume based on CPI is:
Sales per store based on CPI = Sales per store ÷ CPI
The sales per store based on CPI showed the same trend as sales per store without CPI (see
Figure 5.2); therefore, sales per store can be used for the analysis, and the trends as discussed
previously are supported.
100
The growth rate of sales and market share provided another visualization of the
evolution and potentially associated influences on sales in department stores (see Table 5.3 and
Figure 5.3). In 1997, department stores suffered a dramatic decline in growth rate of sales. As
discussed in terms of the CREM, this change along with associated growth in discount stores
(see following sections) indicates the beginning of competition between two retail institution
types, and marks the yield of the top retail institution type position to a new retail institution type
(i.e., discount stores). According to The Report for Retail Operation and Trend (1998, 1999), the
growth rate of sales in department stores in 1997 was - 4.0%, and -7.8% in 1998. The market
share of department stores in South Korea decreased from 14.2% in 1996 to 11.5% in 1998 (Lee,
1996; Pak 1998). During the late 1990s, the decline of sales resulted in the bankruptcy of many
small and mid-size department stores (Kim, 1999; Lee, 2000). This change, according to the
60
CREM, should indicate the beginning of the vulnerable phase and perhaps final demise of the
department store as a retail institution type; however, since 1999, the growth rate of sales in
department stores has begun to increase again as economy has also started to recover.
Table 5.3. Growth Rate of Sales Per Store5
Year Growth Rate of Sales Per Store 1984 12.5 1985 23.1 1986 25.2 1987 33.3 1988 35 1989 14 1990 25 1991 24.3 1992 17.5 1993 18.4 1994 17 1995 16.6 1996 5.6 1997 -4 1998 -7.8 1999 25.2 2000 20.1 2001 15.5
5 The report for retail operation and trend, 1985~2001; The yearbook of distribution industry, 2002
61
Growth Rate of Sales Per Store
-10
-5
0
5
10
15
20
25
30
35
40
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Gro
wth
Rat
e (%
)
Figure 5.3. Sales Growth Rate Per Store6
As with the per store sales trend, when environmental influences affected the operations
of department stores in 1988, 1992 and 1997, the profit rates decreased (see Table 5.4 and Figure
5.4). In contrast to other measures of the change and thereby evolution of a retail institution type,
except for these declining years; the profit rate remained relatively stable over time (i.e., average
21% of total sales). The CREM proposed that as a retail institution type became mature and
successful, profit rates were expected to increase. However, the result showed that profit rates
did not necessarily increase as a retailer achieved a sales increase. Regardless of the increase or
decrease of sales and costs, department stores tried to maintain a certain level of profit rates.
However, in another interpretation of the data, even though the profit rates were stable, the value
of profit (i.e., amount of money) actually increased in the years that have increased sales volume
because the profit rate is calculated based on the sales volume of the year. Therefore, even
though the profit rate did not increased as department stores mature, the actual profit (i.e.,
amount of money) increased; however, when environmental influences affected change, the
profit decreased as profit rates and sales volume decreased. Again, profit was also affected by
environmental influences, while department stores matured.
6 The report for retail operation and trend, 1985~2001; The yearbook of distribution industry, 2002
62
Table 5.4. Profit Rate7
Year Profit (%) 1986 22.5 1987 20.3 1988 19.5 1989 19.7 1990 19.7 1991 21.2 1992 19.0 1993 20.3 1994 22.6 1995 22.1 1996 21.4 1997 20.1 1998 20.0 1999 21.5 2000 22.0 2001 23.0
Profit Rate
0
5
10
15
20
25
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Rat
e (%
)
Figure 5.4. Profit Rate8
7 The report for retail operation and trend, 1987~2001; The yearbook of distribution industry, 2002 8 The report for retail operation and trend, 1987~2001; The yearbook of distribution industry, 2002
63
In the CREM, upgrading of services and operations is an indication that the retail
institution type is maturing and is spiraling to a higher level. Regarding the upgrade of services
and operations, as a retail institution matures, department stores in South Korea generally
followed the predicted trend. A survey with retail managers showed that the major focus of
management, as department stores grew, was the provision of more services (43.3% in 1983),
more promotions (19.1% in 1985), better products (product assortment: 12.9% in 1987, product
development: 8.6% in 1984), and more facilities (8.6% in 1984) (see Table 5.5). All of these
changes would increase operating costs as proposed in the CREM. To become a mature retail
institution type, not only the facilities for consumers but also the facilities for store operations are
expected to be upgraded to serve consumers. This expectation was met as expected, 15.9% of
respondents in 1987 were concerned about the upgrade of store operating systems. For example,
as shown in Figure 5.5, the number of POS terminals installed per store generally increased over
time, which showed that department stores had placed more financial input in upgrading the
operating system. Another major focus of department stores was store expansion (12.8% in
1985). Department stores increased in size over time, even though the land price of center
business district increased (see Figure 5.6). With the increasing cost of land in downtown
locations in South Korea, maintaining the downtown location would occupy a high proportion of
the operating cost, and the expansion of its size would add more to the operating cost.
As retailers added higher levels of operational practices, employees would need to be
trained to be accustomed to a new system, which would increase operating costs accordingly. In
a positive comparative analysis with the CREM, in 1984, the management topic that was rated as
the highest concern by retail managers was employee training (The report for retail operation and
trend, 1985), which is generally considered very expensive (Kincade, Gibson, & Woodard,
2004). Except for 1997, the growth rate of operating expense continuously increased (see Table
5.6 and Figure 5.7). In general, department stores added an average 20% more to the operating
cost from the previous year.
64
Table 5.5. Management Focus9 Year Topics %
1983
More Service More high brand name product Store expansion Product development
43.3 10.0 6.7 6.7
1984
Employee training More promotion Better service Better facilities Product development Credit purchase promotion Store expansion More high brand name product
19.0 17.2 10.3 8.6 8.6 8.6 5.2 5.2
1985
Better service More promotion Employee training Store expansion Better facilities Credit purchase promotion Product development
21.3 19.1 17.0 12.8 8.5 6.4 6.4
1987
Better management efficiency Sales/operating system Product assortment Management structure Consumer protection policy Product exclusivity Reduce operating expense Employee training
31.8 15.9 12.9 11.4 8.3 6.1 5.3 3.8
Number of POS Terminals Per Store
0
20
40
60
80
100
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Num
ber o
f PO
S Te
rmin
als
Figure 5.5. Number of POS Terminals per Store10
9 The report for retail operation and trend, 1994~1996, 1998 10 The report for retail operation and trend, 1990~2001; The yearbook of distribution industry, 2002
65
Size of Department Store
0.002,000.004,000.006,000.008,000.00
10,000.0012,000.0014,000.0016,000.0018,000.00
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Size
(m2)
Figure 5.6. Size of Department Store11
Table 5.6. Growth Rate of Operating Expense12
Year Operating expense (%)
1986 18.1 1991 22.7 1994 23.0 1995 25.8 1996 18.6 1997 -14.9 1998 -1.7 1999 14.0 2000 16.3 2001 17.4
11 The report for retail operation and trend, 1987~2001; The yearbook of distribution industry, 2002 12 The report for retail operation and trend, 1987~2001; The yearbook of distribution industry, 2002
66
Operating Expense
-20-15-10-505
1015202530
1986 1991 1994 1995 1996 1997 1998 1999 2000 2001
Year
Rat
e (%
)
Figure 5.7. Growth Rate of Operating Expense13
As noted with the dip in 1997 and the specific yearly rate changes, upgrading practices
have not happened at a consistent and continually positive rate, in contrast to the prediction of
the CREM. The number of POS terminals installed per store decreased in 1997, perhaps due to
increasing numbers of bankruptcies among some department stores (further discussed in the next
section) and the large size of the sales decrease. The size of department stores also shows
some fluctuations in 1988 and 1998 (see Figure 5.6). Again, when environmental influences
affected the department store operation during its evolution, the upgrading practices were
reduced. As shown in the Table 5.6, in 1997, department stores reduced operating costs by
14.9% from the operating cost in 1996. In 1998, operating costs were reduced even more (-1.7%)
from the operating cost of the previous year. Therefore, operating costs coincided with changes
in environmental influences and fluctuated rather than continuously increased over time as
department stores matured, which contrasts to the proposition of CREM.
One possible explanation is that the growth and maturity of the department store in South
Korea has occurred over a short time period (40 years) in comparison to the growth and maturity
in the United States (140 years). In addition, environmental influences are not the same between
the two countries in terms of the type of influences and the time when they occurred. Each
13 The report for retail operation and trend, 1987~2001; The yearbook of distribution industry, 2002
67
country had unique environmental influences, and the time period for those influences was
different. South Korea experienced all the environmental influences discussed in this study
within a short time (within 15 years), while the United States did not have some of the
environmental influences that South Korea had or these influences were already experienced at
the entry phase for department stores (about 100 years ago). Due to the differences of lifecycles
and environments, the evolution process of retail institution types in different countries might
vary, which justifies the aspect of the CREM proposing geographic differences across retail
evolutions.
Additional measures used to evaluate the evolution of a retail institution type are labor
and promotion costs (Gist, 1968; Ingene, 1983; McNair, 1958). These measures can provide a
look at the spiraling growth and change of the institution type. According to McNair (1958),
labor and promotion costs were major operating costs, and these costs were expected to increase
as a retail institution matures. However, the data from The Report for Retail Operation and
Trend do not show the increasing rate of labor and promotion costs in South Korea, even when
department stores achieved significant sales increases and upgraded their services and
operations. Even though the wage per hour kept increasing (see Figure 5.8), department stores
reduced the rate of labor cost (see Figure 5.9).
Before 1990, labor cost seemed to increase steadily and generally as predicted, but after
1990, the rate was reduced and perhaps showed the efforts made by retailers to reduce the rate,
even though department stores achieved high sales volume. This trend contrasted to the
prediction of the CREM, which proposed that as a retailer matured, labor cost would increase
due to the increase in wages from increased and improved sales assistance. An influence, such as
advanced operating systems installed as technology developed, is assumed to have helped reduce
labor cost more than McNair expected in 1958 without such technologies. Especially in 1998,
because many people were unintentionally unemployed due to the economic crisis, department
stores could reduce salary and accordingly reduce the labor cost. Further explanation of this
environmental influence is discussed in the next section.
68
Wage Per Hour
0
500
1,000
1,500
2,000
2,500
1990 1991 1992 1993 1994 1995
Year
Wag
e (W
)
Figure 5.8. Wage Per Hour14
Labor & Promotion Cost
0
5
10
15
20
25
30
35
40
45
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
% o
f Tot
al C
ost
Labor Promotion
Figure 5.9. Labor and Promotion Cost15
14 The report for retail operation and trend, 1991~1996 15 The report for retail operation and trend, 1983~2001; The yearbook of distribution industry, 2002
69
In the case of promotion costs, an overall and generally, increasing trend was not shown
as proposed in the CREM. The promotion cost before 1991 tended to decrease, and after 1991, it
generally increased, even though the economic crisis contributed to promotion budge reduction.
The reason why the promotion cost could be reduced before 1991 is explained as follows: while
department stores achieved a significant success and entered the trade-up phase, limited special
efforts to promote stores were necessary, which contrasts to the prediction of the CREM. After
1991, comparing favorably with the processes outlined in the CREM, as the number of
department stores significantly increased (53 in 1989 versus 86 in 1991) (see Figure 5.1) and
competition increased accordingly, promotion became an important marketing strategy to
compete with competitors. Promotion costs, as other operating costs, do not exist within a
vacuum and support is given to the CREM that other influences impact promotion expenditures
(see the influence section).
After 1991, promotion costs for the retail institution type of department store increased as
the CREM predicted; however, before 1991, the trend contrasted to the CREM theory.
Therefore, even though overall operating cost increased as the retail institution matures, labor
and promotion costs were not the major factors that contributed to the rise in operating costs, and
the rise was not a steady increase as previously predicted. The CREM was partially supported in
labor and promotion costs.
In summary, the sales volume and profits generally increased as department stores in
South Korea matured, following the trend predicted in the evolution portion of the CREM, until
an economic crisis happened. Department stores continuously achieved sales and profit growth
when no major environmental influence interrupted its success; however, when department
stores were affected by a negative environmental influence (e.g., economic crisis), the sales and
profits discontinued to grow. The CREM did not predict that an environmental influence could
negatively affect the retail evolution. Results indicated instead that a growth in sales and profit
did not follow a steady and generally upward maturation of a retail institution but fluctuated
depending on influences of environmental changes.
The same results are seen in the case of operating costs. Department stores in South
Korea upgraded their services and operations as they aged or matured, and accordingly the
operation costs increased until negative environmental influences affected the growth of
department stores. However, labor and promotion costs were not the major factors that increased
70
or decreased operation costs. Contrary to the proposition of the CREM, the labor and promotion
costs decreased along with the growth of department stores. However, negative environmental
influences and the decrease in sales volume contributed to the promotion cost increase.
Therefore, the CREM is partially supported in the evolution of department stores in South Korea.
This supports the limitation mentioned by Oren (1989). He argued that price and expense factors
cannot solely explain retail evolution. Many other factors may affect retail evolution.
Environmental Influences on Department Stores
Changes in variables within the environment, such as society, technology, economy, and
legislation, are predicted by the CREM as highly correlated with the evolution of department
stores. Since a modern-style department store opened in the 1960s in South Korea, positive and
negative retail environments have had noticeable effects on the evolution of department stores.
Social environment. Increasing population in metropolitan areas and developing
transportation and communication systems are changes in the social environment that were noted
to elicit a synergistic effect on the location of department stores within the center of metropolitan
areas (Kim, 1999; Lee, 1996; Lee, 2000). Since the 1970s, South Koreans have moved into cities
from the more rural surrounding areas. Currently, high population density within the cities has
contributed to people’s movement to suburban areas. The movement into the cities started
decreasing since 1988 as shown in the Figure 5.10. Yet, cities in South Korea continued to have
high population density, which contributed to the growth of department stores that were still
located in the center of cities. A high rate of population growth and density generated high sales
and profits, according to Ingene and Lush (1981). They found that new residents purchased a
greater quantity of products than established residents did and preferred large and new modern
stores, which had better and easier store environments in which to shop compared to old and
small traditional stores. The prediction based on the environmental influence section of the
CREM is supported. The social environment highly affected the location decision for department
stores since their importation.
As stated in the evolution section on department stores, this retail institution type has
continued to mature or up-grade their characteristics to serve these new residents in cities and
achieved a high success corresponding with this growth of city population; however, consumers
71
are currently moving to suburban areas to avoid the high traffic congestion and high living costs
inside city areas (Kim, 2000). For this reason, department stores located in the center of a city are
predicted to experience a decrease in sales in the near future, as CREM predicted the entrance of
the department store into the vulnerable phase. This evolution indicates that as mentioned
previously, the environmental influences not only affected the operation of department stores,
when they were imported, but also continuously affected the evolution process over time.
Population Movement into Cities
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1967 1970 1975 1980 1985 1988 1990 1994 1995 1996 1997
Year
Peop
le
Figure 5.10. Population Movement into Cities16
Technological environment. As the economy has grown since 1960, transportation and
communication systems have significantly developed in South Korea, and these advanced
systems are predicted by the CREM to have helped retailers create a more efficient retail
environment. In addition, consumers’ accessibility of these technologies increased along with
technological development. This high accessibility allowed consumers more possibilities to
enjoy more the convenient shopping environment. For example, car ownership during this period
increased significantly (see Table 5.7 and Figure 5.11). In 1960, only 4,200 cars were registered
among the population of 25 million. In 2002, over 13 million cars were registered among the
population of 47million. During this time, one of 3.5 people purchased a car for home-use. If the
16 Changes of Korean society and economy in 50 years, 1998
72
number of cars purchased for business-use is added, the figure is increased. This increasing car
ownership provided easy access for consumer to stores and enabled consumers to shop often (Ji,
1995). Therefore, this technological environment contributed to changes that consumers made in
their shopping orientations. The CREM did not predict this direct relationship between
environmental influences and shopping orientation.
Table 5.7. Car Registration for Home use17
Year Car Registration (1000)
1960 4.2 1965 5.5 1970 28.7 1975 50.1 1980 178.5 1985 449.1 1990 1,902.1 1995 5,778.0 1997 9,860.1 1998 9,908.6 1999 10,550.2 2000 11,389.0 2001 12,193.8 2002 13,133.3
17 Monthly statistics of Korea, 2002
73
Number of Car Registration for Home Use
0
2000
4000
6000
8000
10000
12000
14000
1960 1965 1970 1975 1980 1985 1990 1995 1997 1998 1999 2000 2001 2002
Year
Num
ber
Figure 5.11. Car Registration for Home Use18
Advanced communication systems, such as TV, radio, and telephone, increased
department stores possibilities to reach more consumers. In addition, technology changes and
economic growth meant that consumers could easily access these systems. For example, the
number of home phone and cellular phone registration significantly increased (see Figure 5.12
and Figure 5.13). People started having a home phone and cellular phone together. Recently, the
marketing activities through cellular phone considerably increased in South Korea. A high
accessibility of an advanced communication system is predicted by the CREM to have
accelerated department stores’ success by promoting stores through these systems. Since 1998,
department stores have put more efforts into promotions to initiate more consumption by
consumers because the economic crisis reduced consumer spending. However, developing
communication systems and consumers’ high accessibility of these communication systems
made the promotion costs increase. This new method of promotions became an expensive
method to reach consumers.
18 Monthly statistics of Korea, 2002
74
Home Phone Registration
0
10
20
30
40
50
60
1960 1965 1970 1975 1980 1985 1990 1995 1997 1999 2000 2001
Year
Num
ber (
/100
Peo
ple)
Figure 5.12. Home Phone Registration19
Cellular Phone Registration
0
10
20
30
40
50
60
1974 1982 1990 1992 1994 1995 1996 1998 1999
Year
Num
ber (
/100
Peo
ple)
Figure 5.13. Cellular Phone Registration20
19 Korea seen by statistics, 2000; Monthly statistics of Korea, 2002 20 Korea seen by statistics, 2000
75
Also, advanced technology affected internal operations, and helped department store
managers to run the stores more effectively and efficiently so that department stores could
achieve high success in sales. For example, a POS system, as mentioned previously in the section
on department store evolution, paralleled the maturity and increased developmental level of the
retail institution type; however, this technology again increased operating cost. On the other
hand, more automated operating systems should have reduced the labor cost. Continuously
developing technology and the high accessibility to both retailers and consumers helped the
success of department stores, but a positive relationship was not found when other environmental
influences affected the operation of department stores more powerfully than the technological
environment. For example, the sales per store decreased in 1988, 1993, and 1997, even though
the statistics of technology continuously increased. Therefore, the results indicate that
technology can be a positive influence for the success of a retail institution but is not always
paralleled with the valleys and peaks of department store evolution.
Economic environment. According to Ingene and Lush (1981), when people have more
income, they demand more expensive and greater quantities of products; therefore, the increase
in income (i.e., demographics), which is the result of a growing economy, was predicted to
change consumers’ shopping behavior and then, positively influence sales in stores and
ultimately initiate retail evolution. The CREM proposed a direct relationship between the
environment influences and consumers’ preference for store/product attributes; however, the data
supported the indirect relationship through consumer’s demographics and shopping orientation
as Ingene and Lush predicted.
In South Korea, as the economy grew from 1960s to the mid 1990s, consumers’ income
and living standard increased (Ji, 1995). Multiple indexes were used to verify the income change
over time. An examination of statistics of GNI per capita showed a continuous increase between
1985 and 1996 (see Table 5.8 and Figure 5.14). The number increased five times from $2,229 in
1985 to $11,385 in 1996. Also, the increasing salary in wholesale/retail/restaurant/
accommodation industry supported the fact that people had more income over time (see Table
5.9 and Figure 5.15). The salary in the industry increased 3.7 times between 1985 and 1997.
Household income also rapidly increased since 1965 (see Table 5.10 and Figure 5.16).
Household income increased more than five times from 1985 to 1997. All indexes showed the
76
increase in income, especially since 1990. Therefore, the relationship between environmental
influences and consumer’s demographics was found.
Table 5.8. GNI Per Capita21
Year GNI per capita 1970 249 1975 592 1980 1,598 1985 2,229 1990 5,886 1995 10,823 1996 11,385 1997 10,315 1998 6,744 1999 8,595 2000 9,770 2001 8,900 2002 10,013
GNI Per Capita
0
2000
4000
6000
8000
10000
12000
1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002
Year
Dol
lar (
$)
Figure 5.14. GNI Per Capita22
21 Monthly statistics of Korea, 2002 22 Monthly statistics of Korea, 2002
77
Table 5.9. Salary in Wholesale/Retail/Restaurant/Accommodation Industry23
Year Salary (W1000) CPI Salary Based on CPI (W1000) 1970 19.8 10 198.0 1975 52.7 18 292.8 1980 211.0 41 514.6 1985 372.0 53 701.9 1990 655.2 75 873.6 1994 1,035.4 89 1,163.4 1995 1,144.4 90 1,271.6 1996 1,284.3 91 1,411.3 1997 1,394.2 93 1,499.1
Salary in Wholesale/Retail/Restaurant/Accomodation
0
200
400
600
800
1000
1200
1400
1600
1970 1975 1980 1985 1990 1994 1995 1996 1997
Year
(W10
00)
Salary Salary Based on CPI
Figure 5.15. Salary in Wholesale/Retail/Restaurant/Accommodation Industry without and with
CPI24
23 Average monthly salary, 2003; CPI calculation, 2003 24 Average monthly salary, 2003
78
Table 5.10. Household Income25
Year Household Income (W) CPI Household Income
Based on CPI (W) 1965 8,450 6.6 128,030 1970 28,180 10 281,800 1975 65,540 18 364,111 1980 234,086 41 570,941 1985 423,788 53 799,600 1990 943,272 75 1,257,696 1995 1,911,064 90 2,123,404 1996 2,152,700 91 2,365,604 1997 2,287,335 93 2,459,500 1998 2,133,100 97 2,199,072 1999 2,224,700 98 2,270,102 2000 2,386,900 100 2,386,900 2001 2,625,100 103 2,476,509
Household Income
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
1965 1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001
Year
W
Household Income Household Income Based on CPI
Figure 5.16. Household Income without and with CPI26
25 CPI calculation, 2003; Monthly statistics of Korea, 2002 26 Monthly statistics of Korea, 2002
79
In 1997, South Korea encountered an economic crisis and all income indexes showed a
significant decrease. The growth of GNI per capita showed a drastic reduction from $10,315 in
1997 to $6,744 in 1998. Household income also decreased from W2,287,335 in 1997 to
W2,133,100 in 1998. To verify whether the increase or decrease in income was truly meaningful
based on inflation, salary and household income were recalculated with CPI with the same
equation used previously (see Table 5.9 & 5.10 and Figure 5.15 & 5.16). The results showed the
same trend as the statistics without CPI; however, the decrease in household income between
1997 and 1998 became more significant than the decrease without CPI. The increasing
unemployment rate since 1997 supported the significant decrease in household income and sales
in department stores (see Table 5. 11 and Figure 5.17). Unemployment rate before the crisis
seemed to be very stable as around 2.0, but in 1998, the rate jumped to 6.8, which is 3.4 times
more than before the crisis. As consumers’ income significantly and rapidly decreased, they
became price sensitive and developed value-seeking behaviors (Cha, 1998). Consumers could
not afford to purchase the products that they had bought at department stores. Reduced consumer
spending resulted in a significant sales decrease of department stores. These findings provide
additional support the relationship between economic influence and consumer’s demographics.
On the other hand, as unemployment rate increased, department stores could reduce the labor
cost because the supply exceeded demand in the labor market. This environmental influence
directly affected the operation and subsequent evolution of department stores. This finding
indicates that the direct relationship between the environmental influences to the evolution of
department stores exists, which was not predicted in the CREM.
Political/legal environment. As an additional influence noted in the CREM, the changing
legal environment was predicted to have affected the emergence of a retail institution type. Since
1989, the South Korean government gradually opened the market to foreign investors (Shin,
2002). The first step of the market opening started in 1989 with technology import and expansion
of foreign investment but was limited only to imported items and wholesales industry. In 1992,
the government started a second step of the market opening, allowing foreign companies to open
less than 10 branch stores with a 1,000m2 size limit. As the third step in 1993, foreign companies
were allowed to open more stores with bigger sizes, 20 stores per company with a 3,000m2 size
80
Table 5.11. Unemployment Rate27
Year Unemployment rate
1965 7.3 1970 4.4 1975 4.1 1980 5.2 1985 4.0 1990 2.4 1995 2.0 1996 2.0 1997 2.6 1998 6.8 1999 6.3 2000 4.1 2001 3.4 2002 2.7
Unemployment Rate
012345678
1965 1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002
Year
Rat
e
Figure 5.17. Unemployment Rate28
27 Changes of Korean society and economy in 50 years, 1998 28 Changes of Korean society and economy in 50 years, 1998
81
limit. As a final step, in 1996, the government opened the South Korean market to foreign
investors without any limitation, because of the need for the acquisition of foreign currency due
to the economic crisis. An exception to the open market was the ban on the importation of
department stores to protect domestic department stores. As a result, many other retail institution
types were imported (e.g., discount stores, warehouse clubs, hypermarkets, category killers),
which appealed to consumers because of their low prices. Even though the government tried to
protect department stores, the importation of other retail institution types created high
competition (Cha, 1998). Discount stores became the strongest competitor to department stores
because they carried a similar product mix and one-stop shopping, and offered regular low prices
(Jeong, 2000). This legal environment, although designed to protect department stores,
negatively affected department stores in their evolutionary cycle. These findings contribute
support to several sections of the CREM. The legal environment opened a space for importation
of new retail institution types in South Korea, which supports the relationship between the
environmental influences and the emergence of a new retail institution type as is diagramed in
the CREM. In addition, as mentioned previously, opening the South Korean market increased
competition within and between retail institution types, and the legal enforcement affected retail
operations by restricting or allowing store size and the number of stores during a retail type
evolution. Therefore, the relationship between environmental influences and the conflict and the
relationship between environmental influences and the evolution of retail institutions were found
from the data.
Other influences. In addition to the changing economic and political/legal environments,
department stores encountered other environmental influences that affected their evolution. A
high land cost in center business districts resulted in the lack of parking lots, which has always
been a constraint for would-be consumers. Traffic congestion in metropolitan areas, where most
department stores are located, seriously influenced the amount of consumer traffic to the stores
(Cha, 1998).
Consumer Influences on Department Stores
Since South Korea’s liberation from Japan in 1945, the number of middle class people in
South Korea has increased, along with an increase in their income. The CREM predicts that
82
these consumers searched for variety of product, and purchased high fashion, high quality
products. Accordingly, more consumers were able to pay higher prices for higher value, and had
the desire to purchase quality products (Ji, 1995). In addition, with the increase in standard of
living, consumers pursued both a high quality of life and an increased differentiation of
themselves from others (Lee, 1996; Ok & Kim, 1997). Over this time, consumers have looked
for ego-intensive products and services (Pak, 1998). These influences are tracked in the CREM
by the relationships drawn among consumers’ demographics, shopping orientations and
consumers’ preference for store/product attributes. To satisfy their needs and complete their ideal
idiosyncrasies, consumers spending increased accordingly, and they sought an appropriate retail
institution type. To meet these consumer needs, department stores were spirally changing
including offering a higher level or image-forming products (e.g., highly recognized national
brand-name products, high-fashion products, high-quality products). The adequacy of
department stores to meet this consumer influence can be seen in patronage patterns. Until 1996,
most South Korean consumers displayed strong patronage to department stores, regardless of
their demographic differences (Gu, 1998); therefore, consumer influence on the evolution of
department stores was supported by previous research. This direct relationship between
consumer and the evolution of department stores was not proposed by the CREM. More details
are explained in the following paragraphs. (Note: As previously mention in Chapter 4, the data
for this consumer section has been analyzed previously by some researchers so that the format of
data analysis appears more often as reviews of previous research rather than analysis of primary
and raw data.)
The relationship of changing consumers and the corresponding changes in the spirally
developing department stores was seen by reviewing the data on consumers’ changes in
demographics, shopping orientation and preference for store/product attributes and by comparing
to the changes noted in department stores, described both here and in the evolution section. The
major demographics studied in previous research of department store consumers were age,
occupation, household income and education. In South Korea, department store consumers were
mostly in their 20s and 30s (59.7%) (Cha, 1998). They were housewives (42%), employed
(28%), or students (21%). In department stores, 23% of consumers had a household income
ranging from $2,000 to $3,000 per month, and 26% had an income of more than $3,000 per
month (Lee, 2000). The majority of consumers (56%) had earned more than a college degree,
83
and 39% of the remaining consumers had earned more than a high school degree (Cha). Those
consumers who usually shopped at department stores were in the upper and upper-middle
socioeconomic classes, and were called “non-price-conscious consumers” (Kim, Choi, Song, &
Jeon, 2000; Lumpkin & Burnett, 1991).
The frequency of visits to a department store was once a month (37.0%), or two or three
times per month (43%) (Kim, 1999). This visit frequency can be used to illustrate the
interrelationship between consumer demographics and shopping orientation. Before the
economic crisis, consumers chose department stores as a major shopping store (53.7%);
however, after the economic crisis, this number decreased to 40.3% (Cha, 1998). Before 1997,
consumers spent an average $250 per month at department stores. After the economic crisis, the
majority of consumers (53.7%) spent less than $250 per month. The main product categories of
consumer purchases at department stores were apparel (63.0%), accessory (20.0%), and food
(17.0%) (Kim). Consumers preferred purchasing high-involvement products (i.e., apparel,
furniture, appliances) at department stores (Lee, 2000). After the economic crisis, consumers
tended to postpone their purchase at department stores until products were on sale (Kim; Lee).
Sales volume was thus significantly decreased, especially in sales of electronics (-18%) and
cosmetics (-15.0%) (Cha). According to Um (1998), 41.7% of consumers reduced expenses for
apparel, and 37.3% of consumers reduced expenses for leisure products after the crisis. As the
number of personal bankruptcies increased, consumption of luxury products and high-priced
foreign brand-name products decreased, and domestic product consumption increased by 84.9%
compared to consumption prior to the economic crisis (Um).
The main reason for these changing shopping orientations was the decrease in income
due to the economic crisis. These findings also contribute support to the product/situation
variable that was introduced in the consumer phase of the CREM. However, rather than a cause
that influences shopping orientation as the CREM proposed, the product/situation in the data was
shown as the result of changed shopping orientation. The pattern observed in the data is that
changes in shopping orientation due to changes in demographics influenced consumers’
product/situation, as choosing different products or changing/selecting situations. The
relationship between product/situation and shopping orientation, which was originally proposed
in the CREM, has different meaning from the above relationship found from the data. The
84
product/situation in the CREM is a condition/proposition set ahead to find the consequence of
shopping orientation, which was not found in this study.
Support for how changes in shopping orientation affected consumers’ preference for
store/product attributes were shown from the data collated from several previous research
studies. Prior to 1997, the attributes that consumers considered most when they shopped at
department stores were convenience (48.0%), credit (39.0%), fashion (38.1%), quality (33.6%),
and price (15.7%) (Um, 1998; Ji, 1995; Kim, 1999; Lee, 2000). Several researchers found that
service was the most important attribute, when consumers shopped at department stores (Jeong
& Park, 1993; Kim). Other attributes were highly recognized brand-name products, store
reputation, and knowledgeable sales personnel. Regarding apparel products, consumers were
concerned most about brand names (34.8% in 1990, 42.9% in 1991, 53.4% in 1992) and design
(43.5% in 1990, 42.9% in 1991, 32.8% in 1992) (The report for retail operation and trend, 1991,
1992, 1993). Consumers chose department stores for the department store type attributes. After
the economic crisis, consumers changed their priority of attributes. Price was the most important
attribute (30.6%), followed by quality (29.1%), fashion (27.6%), service (18%), and brand-name
products (9%) (Um; Lee). Consumers changed their shopping orientation from brand loyalty to
store loyalty. Regardless of brand names, consumers, who were brand loyal, shopped at any store
that carried the value product they want to buy.
In summary, changing environmental influences affected consumers’ demographics. This
changed demographics made consumers adjust their shopping orientation appropriate to the
changed demographics. Changed shopping orientation rearranged consumers’ preference/priority
of store/product attributes and choice of product/situation. This changed preference and priority
directly affected the evolution of department stores, which is not designated in the CREM, and
became the base of the emergence of PBH as the CREM proposed.
Overview of the Spiral Evolution of Department Stores
As a retailer adds a higher level of operational practices and increasing operation costs
erode product prices, the retailer becomes vulnerable to its competitors. As a result, the retailer
modifies or evolves its characteristics to survive in a highly competitive retail environment. This
modification/evolution is caused not only by a conflict with its competitors (more information is
expanded in the conflict section) but also by environmental and consumer influences as
85
discussed in the previous two sections. A mature retailer ultimately focuses on product quality
and services rather than on prices, opening a space for a new low level of retail institution to
enter. This evolutionary process was discussed in the CREM and the historical data to support
this process was presented in the previous three sections.
Continuing with the comparisons between the historical data and the CREM, from 1997
to 2003 in South Korea, department stores took several paths to continue to evolve and to meet
the challenges of competitors and the influences of environments and consumers. Some of the
mature department stores upgraded their mature and traditional department store characteristics
and their, middle-class, target market and became up-scale apparel specialty department stores,
offering exclusivity in products and services. They accordingly upgraded their management
systems by starting a loyalty program and consumer database marketing (Kim, 1998). These
stores did not return to the original position in a cycle but went to a higher position than its
previous peak position, as in a spiral. On the other hand, some mature retailers have focused on
product prices by reducing operation costs to survive price competition, and returned to a
position similar but different and lower from its original position where the wheel of evolution
started, when they opened new discount department stores. This finding supports the spiral
evolution described in the CREM in terms of operations, the retailer does not return to its
original position because environments including its competitors and consumers evolved along
with the retail evolution, and its characteristics and operating level changed to adjust these
changing environments. However, in terms of the price level, the spiral points below the original
position when the wheel started.
In South Korea, the economic crisis in 1997 changed consumers’ shopping behavior and
created high competition with newly introduced discount stores. Many department stores could
not compete with these discount stores, which offered quality products with lower prices that
consumers started looking for. Department stores lost their market share significantly. As a
result, some department stores changed their retail type. They expanded their business into a
multi-format business. They domestically and internationally opened discount stores, specialty
stores, and telecommunication/catalog shopping formats, as means of providing an
organizational support system among each other (Im, 2000). Some loss in one retail institution
type was to be complemented by the profit of another retail institution type. On the other hand,
some department stores tried to find a niche market and downgraded into a local mid-size
86
department store. Some department stores tried to differentiate themselves from other department
stores by launching their private brands to achieve product competitiveness in an effort to be a
special department store (Kim, 1998). Also, department stores started strategic corporations with
other channel members to use operational variables to maximize the efficiency of management,
production and marketing as a means of survival. Many department stores, which could not
response promptly to this changing environment and high-level of competition, had to go out of
business. Therefore, the spiral wheel was supported as retail institutions disappeared when they
returned or stayed at the same position as when the wheel started. These recent changes are
compatible with the spiral evolution predicted by the CREM as one retail institution type was
faced with competition from a new store type and was forced to close or change internally within
operations and other organizational variables.
Discount Stores in South Korea
Background
Discount stores have been a major retail institution type in the United Sates since the
1960s; however, in South Korea, discount stores were imported in the 1990s (Kim & Chen-Yu,
2003). The first discount stores opened in 1994 and quickly achieved significant financial
success (Lee, 2000). Since the economic crisis in 1997, discount stores have diffused quickly
into the South Korean retail market (Kim, 1999). From the late 1990s, the discount store has
become the major retail institution type, rising in sales and popularity over the department store.
In South Korea, as in the United States, the discount store is a type of retail institution
that continually sells products at prices lower than other retail institution types (Lee, 1997). Low
prices are achieved by fast turnover, economies of scale, and reduction of operation costs (e.g.,
reduced advertisement costs, self-selection service) (Ji, 1995; Pak, 1998). Discount stores can
maintain margins at 20% to 30% of retail prices, while the margin of a department store is, on
average, 50% of retail prices (Ji; Kim, Choi, Song, & Jeon, 2000). Discount stores mainly carry
food and convenience products for daily life. In addition, they carry apparel and electronics.
Lower prices do not indicate lower quality in discount stores in South Korea (Lee, 2000). Most
products in discount stores are national brand-name products (Lee, 1997; Lee, 2000), and,
recently, discount stores are producing their own private-brand products.
87
Unlike traditional U.S. discount stores, food is the primary product category in discount
stores in South Korea (Lee, 2000). The South Korean discount store is similar to discount
hypermarkets in the United States, and almost 50% of total sales come from the food category.
While the more recent hypermarkets coexist in the United States with the earlier and smaller
forms of the discount store, there is no clear distinction between discount stores and
hypermarkets in South Korea (Kim, 2000). In another difference from U.S. discount stores, most
South Korean discount stores operate in buildings with more than two stories, with extra stories
for parking lots (Lee, 2000). Again, as with department stores, the discount store seemed to
emerge in South Korean retailing at a more advanced maturity (beyond the entry phase) than the
institution type did in the United States.
Cyclical Evolution of Discount Stores
As proposed in the CREM and evidenced in the data, discount stores in South Korea
started with low priced products as a competitive tool against the department stores. Discount
stores in South Korea became popular within a short time period, especially after the economic
crisis in 1997. The total sales data supported this evolution of popularity and growth of discount
stores. The total sales of discount stores in 1997 were W3.35 trillion (The yearbook of
distribution industry, 1998, 2001). By 2000, the total sales increased 3.3 times within three years
to W11.2trillion. In 1997, the growth rate of total sales was 137% compared to that of 1996 (Lee,
2000). The average rate of sales growth was 32% since 1998. Sales of apparel products increased
900% and sales of do-it-yourself products increased 50% in 1997 (Cha, 1998). In 2000,
continued growth was expected by trade analysts. The rate of sales growth was expected to be
30% every year, and the market share of discount stores was expected to be 11.3% of total retail
sales in 2003 (Kim & Chen-Yu, 2003; Lee).
Even though the total sales of discount stores continuously increased from 1997 to 2002,
the statistics of sales per store showed a conflicting trend. Before 1997, the sales per store were
increasing; however, in 1998, the sales per store decreased by 0.5% (1997-W72.2billion, 1998-
W71.8billion) (see Table 5.12 and Figure 5.18 & 5.19), even though the total sales increased
from W3.35trillion in 1997 to W5.5trillion in 1998 (The yearbook of distribution industry, 1998,
1999). Also, a decreasing sales trend was shown in 2001. In 2001, the sales per store decreased
by 2.2% from the sales in 2000 (2000-W84.9billion, 2001-W83billion). To further verify this
88
trend, the sales per store were recalculated with CPI using the same equation used previously.
The negative trend was present before and after the recalculation, and the decreased amount in
1998 and 2001 compared to previous years actually became more significant with the CPI
adjustment than the data without CPI (1997-W77.6billion, 1998-W74billion; 2000-W84.9billion,
2001-W78.3billion). When doing the comparison with the CREM, the reason for decreased sales
per store might be a reflection of the general economic crisis and increasing competition;
however, the competition is from the same store type and other existing store types and not yet
from a new store type. As shown in Table 5.12 and Figure 5.20, the number of discount stores
significantly increased as this type of store achieved a significant success. The number doubled
between 1997 and 2000 (i.e., 1997-78, 2000-160). When examining the source of the
competition for comparison to the CREM, data show that not only domestic discount stores but
also foreign discount stores added to the level of competition. (Reasons for this influence are
discussed in the legal environment section).
Table 5.12. Sales Per Store, Growth Rate of Sales Per Store, and Number of Discount Stores29
Year Sales Per Store (W million)
Sales Per Store Based on CPI
(Year 2000 Base)
Growth Rate of Sales Per Store
Number of Discount Stores
1995 57,570 63,967 N/A 25 1996 63,020 69,253 9.5 45 1997 72,200 77,634 14.6 78 1998 71,810 74,031 -0.5 90 1999 73,740 75,245 3.0 119 2000 84,900 84,900 14.7 160 2001 83,010 78,311 -2.2 N/A
29 CPI calculation, 2003; The report for retail operation and trend, 1996~2001; The Yearbook of Distribution Industry, 1996~2002
89
Sales Per Store
010,00020,00030,00040,00050,00060,00070,00080,00090,000
1995 1996 1997 1998 1999 2000 2001
Year
Wm
illio
n
Sales Per Store Sales Per Store Based on CPI
Figure 5.18. Sales Per Store without CPI and Sales Per Store Based on CPI30
Growth Rate of Sales Per Store
-4
-2
0
2
4
6
8
10
12
14
16
1996 1997 1998 1999 2000 2001
Year
%
Figure 5.19. Growth Rate of Sales Per Store31
30 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002 31 The report for retail operation and trend, 1997~2001; The yearbook of distribution industry, 1997~2002
90
Number of Discount Stores
020406080
100120140160180
1995 1996 1997 1998 1999 2000
Year
Figure 5.20. Number of Discount Stores32
Competition with department stores also affected the decrease in sales as department
stores tried to lower their prices due to the economic crisis. This factor becomes important for
the second dip in sales experienced after 1997. Even though consumers spent more money in
discount stores, especially after the economic crisis, as the number of discount stores increased,
the sales per store actually decreased. In addition to the increasing number of discount stores,
the recovering economy might affect the decrease in sales in 2000. According to Lee (2000), the
slowed growth rate of sales since 1999 (i.e., 26.8% in 1999, 25.7% in 2000, 23.2% in 2001,
22.5% in 2002) shows the decreasing popularity of discount stores as the economy has gradually
been recovering. Therefore, while the total sales increased as predicted from the CREM, the
sales per store did not increase due to increasing competition and an improving economy. The
CREM proposed that the competition/conflict between retail institution types affected the
evolution and this proposition is supported by the data. As an environmental influence, the
recovering economy affected the operation of discount stores, while they were evolving. This
new relationship was also found in the case of department stores. Therefore, the data indicate
that environmental influences not only provided a base to open a new retail institution type, but
also have continuously affected the evolution of existing institution types.
32 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2001
91
Additional measures of evolution of a retail institution type include profit, growth of
profit, and operating costs (Gist, 1968; McNair, 1958). Even though the total sales continuously
increased, discount stores did not achieve an increase in the profit rate for all years from 1996 to
2001. The profit rate decreased in 1998 by 0.1% from that of the previous year, and decreased by
0.3% in 2000 from that of 1999 (see Table 5.13, Figure 5.21, and 5.22). As profit can simply be
calculated by the subtraction between total sales and costs (Kincade, Gibson, & Woodard, 2004),
the costs must be the reason for decreasing profit. The profit rate did not increase as discount
stores succeeded and matured, contrary to the process described in the spiral evolution of a retail
institution type within the CREM. In other words, the profit rate did not decrease after the
maturation of the discount store (i.e., entrance into the vulnerable phase), but decreased during
the maturation. Several factors related to the costs and to the level of development of the
discount stores upon introduction to South Korea may contribute to this unexpected trend. A
business can make a profit by reducing operating expenses or by increasing sales volume
(Kincade, Gibson, & Woodard, 2004). These two factors may work independently, in support of
each other or in opposition to each other. The rising operating costs and reducing per store sales
were both factors for the discount store during this period. Also, this trend provided further
support that the discount store, as an institution type, was imported into the South Korean retail
market as a “mature” retailer, although it was new to this market. As a mature institution type,
the discount store began to exhibit characteristics of operational changes and other maturity
growth patterns. As an indication of a mature retailer, its operating costs had already reached a
peak. Two interpretations of this data seem possible. Discount stores began to enter the
vulnerable phase as indicated by a drop in profit rate, or discount stores in South Korea began
experiencing a drop in profit rate as a result of a vulnerability to other retail institution types.
The proposed decreases in profit, in conjunction with increased operating expenses, in
1998 and 2000 were supported by the increase in number of POS terminals installed per store,
which eventually increased operating costs. The significant increases in 1998 and 2000
compared to the previous years are shown in the Table 5.14 and Figure 5.23. The decrease in
profit in 2000 was also supported by the significant increase in the size of discount stores (see
Table 5.14 and Figure 5.24). In 1999, the average size of a discount store was 8,695.2 m2.
In2000, the size increased by 150% as 12,622.5m2. The cost increased corresponding with the
increase in size and contributed to the profit rate in 2000. Building new stores demands much
92
capital investment, including increased debt from financing of additional money, and tends to
reduce short-term profitability of a business (Boyd, Walker, & Larreche, 1998). As another
factor that might decrease the profit, the number of employees per store showed a significant
increase from 154.6 in 1997 to 232 in 1998 (see Table 5.14 and Figure 5.25). This action too
corresponded with the proposal that the discount stores evidenced the activities of a more mature
store type. However, after 1998, discount stores tried to reduce employees so that they could
reduce operating cost and provide low priced products, as often found in store types that are in
the vulnerable phase.
Table 5.13. Profit and Growth Rate of Profit33
Year Profit (%) Growth Rate of Profit (%) 1996 12.8 N/A 1997 13.3 0.5 1998 13.2 -0.1 1999 15.1 1.9 2000 14.8 -0.3 2001 15.9 1.1
Profit
0
2
4
6
8
10
12
14
16
18
1996 1997 1998 1999 2000 2001
Year
%
Figure 5.21. Profit Rate34
33 The report for retail operation and trend, 1997~2001; The yearbook of distribution industry, 1996~2002 34 The report for retail operation and trend, 1997~2001; The yearbook of distribution industry, 1996~2002
93
Growth Rate of Profit
-0.5
0
0.5
1
1.5
2
2.5
1997 1998 1999 2000 2001
Year
%
Figure 5.22. Growth Rate of Profit35
Table 5.14. Number of POS Terminals, Size, and Number of Employees Per Store36
Year Number of POS Terminals Per Store Size Per Store (m²) Number of Employees
Per Store 1995 N/A 6,204.0 136.8 1996 23.1 7,863.9 149.3 1997 27.1 8,169.2 154.6 1998 34.5 8,314.7 232.0 1999 34.8 8,695.2 210.0 2000 36.0 12,622.5 207.1 2001 35.0 13,526.7 202.2
35 The report for retail operation and trend, 1997~2001; The yearbook of distribution industry, 1996~2002 36 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002
94
Number of POS Terminals Per Store
0
5
10
15
20
25
30
35
40
1996 1997 1998 1999 2000 2001
Year
Num
ber
Figure 5.23. Number of POS Terminals Per Store37
Size of Store
0
2000
4000
6000
8000
10000
12000
14000
16000
1995 1996 1997 1998 1999 2000 2001
Year
Size
(m2)
Figure 5.24. Size of Discount Store38
37 The report for retail operation and trend, 1997~2001; The yearbook of distribution industry, 1997~2002 38 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002
95
Number of Employees Per Store
0
50
100
150
200
250
1995 1996 1997 1998 1999 2000 2001
Year
Num
ber
Figure 5.25. Number of Employees Per Store39
The mature phase of the spiral in the CREM proposed that as a retailer matures, its
operating costs continuously increase. Some factors, discussed previously, accounted for
increased costs and decreased profit accordingly in 1998 and 2000. However, as Table 5.15 and
Figure 5.26 show, even in the years that showed an increase in profit, operating costs
continuously increased. In 1997, when the economic crisis occurred and discount stores became
the most attractive retail store to consumers, discount stores achieved 137% of total sales growth,
and they spent more on operating costs as shown by the steep slope between 1996 and 1997 in
Figure 5.26. Operating cost seemed to increase continuously as predicted from the CREM.
However, when operating costs were recalculated with CPI, a different trend was shown. The
actual operating costs in 1998 and 2001 decreased. In 1998, some costs other than operating
costs or other factors might have affected the decrease in profit. (The complexity of influences is
further discussed in the next section.) In 2001, the decrease in sales due to high competition and
a recovering economy might have affected the decrease in operating cost and profit. The CREM
proposed that as a retailer matures, sales and profit increase as well as operating costs, however,
the data showed that all variables decreased when environmental influences negatively
interrupted the success of discount stores. Therefore, while the discount store spirally evolved in
39 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002
96
South Korea, environmental influences constantly affected the retail evolution, which the CREM
did not predicted.
Table 5.15. Operating Costs40
Year Operating Costs Operating Costs Based on CPI 1995 3,706.4 4,118.2 1996 5,345.8 5,874.5 1997 7,086.4 7,619.8 1998 7,143.8 7,364.7 1999 7,275.1 7,423.6 2000 8,912.3 8,912.3 2001 9,090.2 8,575.7
Operating Expense
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
1995 1996 1997 1998 1999 2000 2001
Year
Wm
illio
n
Operating Cost Operating Cost Based on CPI
Figure 5.26. Operating Costs without and with CPI41
40 CPI calculation, 2003; The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002. 41 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002.
97
As discussed in the department store section, labor and promotion costs contrasted with
the trends of other environmental factors. The data in Table 5.16 and Figure 5.27 showed that the
labor cost kept increasing except in 1997 and 2001. Even though operating costs increased in
1997, the labor cost was reduced by 2.0% compared to the previous year. Again, this supported
the finding that the labor cost was not the major influence on the increase in operating cost;
however, labor cost was the first operating cost with which discount stores responded to the
negative environmental influence. Not all environmental variables were equal in impact or in
timing of influence. Labor cost decreased in the year of the economic crisis (1997) but other
costs statistically started decreasing in 1998. The reason for this reduction in the labor cost in
1997 is not clear because the number of employees and hourly payment only started decreasing
in 1998 (1997-W2, 702, 1998-W2,587; see Table 5.17 and Figure 5.28). Even though low level
of services and the low labor cost due to a small number of sales personnel are the representative
characteristics of discount stores, the labor cost started increasing again, which follows the
prediction derived from the CREM. However, in 2001, the labor cost decreased again by 2.0%
compared to the previous year. This reduction might be caused by the improving economy of
South Korea. Due to this recovering economy, the importance of price decreased, which is the
most attractive attribute of discount stores, and ultimately the sales decreased from W84.9billion
in 2000 to W78.3billion in 2001 (i.e., -2.2% decrease). The decrease in sales might have affected
the labor cost in 2001. Reducing sales associate hours or numbers is a reaction, although often
self-defeating, that is frequently used by stores for a quick response to dropping sales (Kincade,
Gibson, & Woodard, 2004). In addition, even though discount stores achieved success, they
might have reduced the labor cost due to a high unemployment rate. Since 2000, as the economy
was improving, the payment to labor seemed to be increasing. However, the payment based on
CPI shows a different trend in 2001. Even though the hourly payment seemed to increase in
2001, the hourly payment based on CPI decreased in 2001. Inflationary affects masked some of
the trends in the data.
98
Table 5.16. Labor and Promotion Costs42
Year Labor Cost (%) Promotion Cost (%) 1995 34.1 5.5 1996 38.2 6.6 1997 36.2 7.0 1998 36.4 5.6 1999 37.3 7.4 2000 37.7 7.1 2001 35.7 8.3
Labor Cost
32
33
34
35
36
37
38
39
1995 1996 1997 1998 1999 2000 2001
Year
%
Figure 5.27. Labor Cost43
42 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002. 43 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002.
99
Table 5.17. Hourly Payment44
Year Hourly Payment Hourly Payment Based on CPI 1995 2,381 2,645.6 1996 2,407 2,645.1 1997 2,702 2,905.4 1998 2,587 2,667.0 1999 2,447 2,496.9 2000 2,723 2,722.5 2001 2,849 2,687.3
Payment Per Hour
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1995 1996 1997 1998 1999 2000 2001
Year
W
Payment Per Hour Payment Per Hour Based on CPI
Figure 5.28. Payment Per Hour without and with CPI45
Promotion costs rapidly decreased in 1998; however, promotion costs generally
increased even when sales and operating costs decreased (see Table 5.16 and Figure 5.29). The
decrease in 1998 was probably reflective of the drop in sales and the general economic crisis. A
retail institution often reduces, although inappropriately but necessarily, promotion cost when
sales drop that other retail institutions also experience at the same time. In contrast, promotion
44 CPI calculation, 2003; The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002. 45 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002.
100
activities are often increased, which tends to increase the promotion cost to attract more
consumers, when a retail institution is having a difficult time due to high competition. As
previously noted, the numbers of discount stores rapidly increased since 1997, and the improving
economy encouraged consumers return to department stores. Contrary to the CREM, promotion
cost decreased when the economic crisis affected the entire South Korean retail industry, but
when a specific retail institution did not compete with its competitors well enough to achieve
positive sales growth, the promotion cost increased, which was predicted in the CREM.
Promotion Cost
01
234
567
89
1995 1996 1997 1998 1999 2000 2001
Year
%
Figure 5.29. Promotion Cost46
Therefore, even though the characteristics of discount stores dictated a small number of
laborers and minimum promotion to reduce operating cost, these costs kept increasing, as the
evolution portion of the CREM proposed. However, when environmental influences (i.e.,
economic crisis, recovering economy, competition) interrupted the growth of discount stores
during the mature phase, the costs decreased. Contrary to the other cost factors, management
used labor cost sensitively and quickly to respond to the environmental influences. Promotion
costs increased when environmental influences negatively affected the growth of a retail
46 The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002.
101
institution. With these findings, the CREM was partially supported by the labor and promotion
costs.
Environmental Influences on Discount Stores
Environmental influences in the CREM were previously identified and discussed in the
department store section. In a similar comparison, changing environments are predicted and
supported as major influences to the emergence and success of discount stores since the mid
1990s. Similar data about the changing environments shown in the department store section were
also used with discount store analysis. As with the results from the department store analysis,
data from this section has been previously examined by some researchers so that both primary
and secondary data are used in the following discussion.
Social environment. Discount stores were opened in the center business district of cities
at their introduction in the mid 1990s. At that time, increasing population, within metropolitan
areas, supported physically sizeable retail institutions, such as large discount stores in contrast to
the traditional, small “street stores” or local department stores (Gil, 1996; Lee, 2000; Moon,
1999). However, the population movement into the cities started decreasing as of 1995 (see
Figure 5.10), and people started moving out of the cities into suburban areas to avoid high land
costs and traffic congestion. Discount store businesses quickly opened stores in these suburban
areas, whose population increased rapidly, to achieve all the benefits of a pioneer retailer (e.g.,
high market share and increased store patronage). This change occurred at the similar time of the
economic crisis; therefore, during and after the economic crisis, discount stores served
consumers not only in metropolitan areas but also in suburban areas. For this reason, the social
environment is proposed to have affected the location decision of discount stores, and the
consumer coverage that was broader than department store markets helped the profitability and
growth of discount stores. Therefore, when the data is compared to the model, the environmental
influences were found to be related directly to the evolution process of discount stores, a
relationship that the CREM did not include.
Technological environment. Gist (1968) mentioned that advanced technology in mass
communication enabled consumers to conduct more self-information searches, which ultimately
102
decreased the importance of a salesperson. Due to changes in advanced technology, a new retail
institution could emerge by lowering operating cost through reducing labor cost. Discount stores
could reduce the number of laborers because consumers know the product that they want to
purchase through their information search. Self-service becomes more acceptable when these
conditions exist. Increasing consumers’ knowledge through advanced media reduced the
importance of salespersons, and discount stores fully exploited this benefit because they carried
general consumer goods, which do not need an expert level of knowledge. In addition, highly
automated operating systems have been developed and installed in discount stores, which
contributed to the reduction in the number of laborers and the labor cost. Similarly, as
management systems improved, discount stores in South Korea applied advanced management
practices from Western countries to their stores to offer store environments comparable to
Western countries within a short time period (Lee, 2000). For example, adoption of advanced
technology (e.g., computerized production system, information network technology, point of
sales system, electronic data interchange, computer database) made effective and efficient
management possible, in addition to the reduction of prices (Gil, 1996; Kim, 1998). As proposed
in the CREM, the technological environment provided a base for the operation of a new retail
institution.
According to Gist, high mobility due to the increase in auto ownership also positively
influenced suburban retail institutions. Increasing car ownership and developing transportation
systems allowed consumers to more easily reach discount stores, which were located both inside
and outside of metropolitan areas (Kim, 2000). This technology environment had the potential to
improve the discount store’s market growth and its dominance over the the department store.
Therefore, the technological environment also influenced, while discount stores were evolving,
which the CREM did not predict.
As discussed in the department store section, the number of car registrations and
home/cellular phone registrations rapidly increased since 1990s. Operating costs were supposed
to increase continuously along with the installation of developing technology and utilization of
mass media for promotion in discount stores according to the CREM; however, operating costs
decreased in 1998 and 2001. Sales per store also showed the same trend of decreasing in those
years. Therefore, the technology environment contributed to increasing the operating costs and
sales, but was not the major cause of unstable figures of operating costs and sales because
103
regardless of increasing technology adoption and its cost, operating costs and sales decreased.
Other environmental influences might have more impact on the operation of discount stores than
the technology environment.
Economic environment. In 1997, the economic crisis in South Korea resulted in the
increase of prices of imported goods and raw materials, due to the increase of taxes and the
unfavorable exchange rate (Kim, 1999). Accordingly, prices of products for daily life increased.
For example, prices of oil, flour, sugar, and gas were imports on which South Korea heavily
relied, due to its lack of natural resources, and prices of these products rose dramatically. As a
result of the economic crisis, the unemployment rate also increased significantly (1997-2.6,
1998-6.8). In turn, consumer income considerably decreased. The GNI showed a slight decrease
in 1996 and then, a steep decrease in 1997 (see Figure 5.14). Household income also decreased
in 1997 (see Figure 5.16). With diminished incomes, consumers became highly sensitive to price
and started looking for low priced products. However, they did not want to give up product
quality and the shopping environment that department stores provided. Korean-style discount
stores met these consumers’ needs and satisfied their wants. Discount stores were accepted by
South Korean consumers, who wanted low-priced but quality products in their financially
difficult time. This acceptance was demonstrated in the growth of sales of discount stores during
this period (see Figure 5.30). Further support for this finding was noted in that manufacturers and
some department stores saw discount stores as the best place to sell their over-stocked
inventories, and some manufacturers started producing products for discount stores only (Gil,
1996). Consumers, who were accustomed to the products provided from department stores, could
purchase similar products in discount stores. This made consumers feel safe to purchase products
in discount stores and ultimately increased consumers’ visits and sales.
The economic crisis since 1997 favored the growth of discount stores in comparison to
department stores. However, with the beginning of the economy recovery, discount stores could
not expect the same sales growth rate as that during the crisis. In a positive comparison with this
influence and evolution, sales per store started decreasing in 2001.
In summary, the results of the data analysis indicated that the economic environment
directly influenced the operation of discount stores in terms of product prices, taxes, labor cost
by unemployment rate, and sales. In addition, the economic environment influenced consumers’
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income (i.e., demographics) and in turn, the changed income affected their shopping orientation.
These relationships were not proposed in the CREM.
Comparison of Household Income and Sales Per Store
0500000
10000001500000200000025000003000000350000040000004500000500000055000006000000650000070000007500000800000085000009000000
1995 1996 1997 1998 1999 2000 2001
Year
Household Income/CPI (W) Sales Per Store (W10,000)
Figure 5.30. Comparison of Household Income and Sales Per Store47
Political/legal environment. As found in the department store section, legal and
governmental environments corresponded to changes in retail institutions. During the late 1990s,
changes in legal and governmental policies were also potential influences to the growth of
discount stores. Prior to the late 1990s, foreign discount companies were restricted within South
Korea in terms of store size, number of stores, product categories, and real-estate ownerships. At
the same time, the lack of foreign currency was a major cause of the economic crisis. When the
government recognized the urgent need for the acquisition of foreign currency, it opened the
47 Monthly statistics of Korea, 2002; The report for retail operation and trend, 1996~2001; The yearbook of distribution industry, 1996~2002
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South Korean retail market to foreign investors (Gil, 1996). Foreign discount companies were
eager to participate in the South Korean market, which was one of the biggest markets in the
world. In the 1990s, South Korea was the world’s ninth largest economy, with 47 million
residents, and one of the most densely populated countries in the world (Han, 1997;
Mammarella, 1997a). When most of the barriers, previously created by South Korea’s
governmental policies toward foreign investments, were removed, foreign companies started
opening their stores in South Korea (Kim, 1999). Because of this increasing competition and
recovering economy, discount stores were required to modify or evolve their characteristics to
adjust to these changing environments, characteristics indicative of the trade-up (or mature)
phase of evolution.
For example, some discount stores launched their own private brand products to
differentiate themselves from other discounters (Lee, 1997; Lee, 2000). (More store adjustment
will be discussed in the spiral evolution section.) The political/legal environment allowed foreign
discount stores to open their business in the South Korean market, which supported the
proposition of the CREM, and resulted in high competition due to an increasing number of
discount stores. This high competition urged domestic discount stores to change their
characteristics to compete with foreign discount stores, which have more attractive store/product
attributes and advanced management systems and skills. The influence from the political/legal
environment to the conflict was not predicted in the CREM.
Consumer Influences on Discount Stores.
Before the economic crisis in 1997, consumers in South Korea were accustomed to
shopping at supermarkets (35%) and at department stores (31%); whereas, only 13% to 22.4% of
consumers shopped at discount stores (Cha, 1998; Kim, 1999). These shopping patterns were
also supported by the sales volume share of discount stores versus other store types. The discount
store sales volume was 1.3% of total retail sales, while that of department stores was 14.2% until
the mid 1990s (Pak, 1998).
Prior to the economic crisis of the 1990s, consumers mainly considered product quality
(41.0%) when selecting supermarkets and department stores. After the economic crisis, the
discount store became the major retail institution type (87.0%) due in a large part to the
significant reduction of consumer income. In the study of Um (1998), 76.5% of consumers
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answered that their income had been reduced since 1997, and 89.3% of these consumers
answered that their income decreased about $1,000 per month. The growth rate of income in
1997 was 7%, but in 1998 the growth rate of income was -14.5%. The Consumer Consumption
Index for South Korean consumers at the fourth quarter of 1997 was 45.6, but at the first quarter
of 1998, decreased to 27.7 because of a simultaneous decrease in consumer income and an
increase in product cost (Um). In 1998, the decline continued and growth rate of consumer
consumption decreased by –13.0% (Kim, 1999). The distinction between the wealthy and the
poor became very significant, as the middle class became the lower class (Kim, Choi, Song, &
Jeon, 2000). Consumers became very cautious about spending their income. Several authors
noted that the economic crisis changed South Korean consumers’ behavior (Lee, 2000; Moon,
1999; “Net Sales growth,” 1999).
Consumers began to seek lower-priced products as they became more sensitive to price.
More consumers planned their spending before a purchase and sought value for price. The
discount store, with its characteristics differing from department stores, satisfied these
consumers’ needs. Before the crisis, Kim and Lee (1994) found that price-conscious consumers
were highly concerned about economics, time, and convenience. Consumers with these concerns
consisted of people who generally had low incomes, low education, and were female over the
age of 40. However, Jin (1998) found that, after the economic crisis, consumers in many social
classes became price-conscious regardless of demographic differences in income level, age or
education. According to “Discount Stores” (1997), 41.6 % of discount store patrons were 31 to
40 years old. This proportion was an increase of 3.8 % compared to the previous year of 1996.
The next largest age group included those 21 to 30 years old, and accounted for 22.9 % of
patrons. The change for this group was an increase of 2.9 % compared to 1996. In the past,
elderly shoppers, considered an economic risk for retailers, were the major consumer group for
discount stores; however, during and immediately following the economic crisis, even the young
age groups, who traditionally have had a low level of economic concern, reported that they
enjoyed shopping at discount stores. These young consumers were called smart shoppers,
dealmakers, intelligent consumers, professional consumers, or value-oriented consumers
(Mammarella, 1997b). In the post crisis period, consumers in their 20s and 30s had the highest
satisfaction rating, over other age groups, with discount stores. The majority of these consumers
(68.6%) had earned a college degree, and 40.5% of consumers were white-collar workers (Gong,
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1999). As the number of working women increased, marketing strategy for discount stores
increasingly emphasized the need to make shopping both timesaving and convenient (Kim &
Kim, 1995). These findings alter the processes described in the CREM. Rather than a direct
influence of environments to consumers’ preference for store/product attributes, environmental
influences affected consumers’ demographics and in turn, these changed demographics affected
consumers’ shopping orientation.
According to a study of the counter strategy for domestic retailing to respond to
changing environments, immediately after the economic crisis, consumers reported that product
prices were the most important attribute (63%), when they selected a retail type (Kim 1999).
Consumers became more involved in searching for products more appropriate to their income
level (Kim 1999; Lee, 1996). According to a study conducted by Gu (1998), most discount store
patrons were satisfied with the price (70 %), the wide range of merchandise (63.2 %), return
policies (62.4 %), and customer service (61.7 %). Satisfaction with quality for price (60.6 %) and
merchandise (58.1 %) was somewhat lower. In another study, the most important variables,
which affected consumers’ satisfaction in discount stores, were product price (35.5%), product
variety (15.7%), product quality (12.4%), and parking availability (11.6%) (Gong, 1999).
According to Sul, consumers attracted to discount stores were highly satisfied with payment
options, a clean environment, and customer service, in order of decreasing satisfaction. Many
researchers agreed that convenient locations, low prices, wide assortment, large store sizes, and
one-stop shopping were the top five important attributes of discount stores (Koh, Park, & Lee,
1997; Mammarella, 1997b; Park & Lim, 1996; Sul, 2000).
Consumers evaluated that the prices of food, appliances, and convenience products at
discount stores were cheaper than other retail institution types (Sul). Consumers mostly
purchased food (43.1%), convenience products (19.0%), and shoes/apparel (3.2%) at discount
stores. Most consumers used their own vehicle (70.4 %) because they purchased a large quantity
of goods in a single trip. These findings show that the changes in consumers’ shopping
orientation influenced consumers’ preference or priority of store/product attributes, which is
designated in the CREM. As discount stores provided store/product attributes that met the
changed consumers’ preference, the number of consumers who used discount stores increased.
This finding provides support for the process that consumers influence the evolution of a retail
type as well as competition, which was not included in the CREM
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However, with the recovering economy, frequency of visit and amount of spending at
discount stores seems to be decreasing. Although discount stores stay open late in the evening
and are open seven days a week, the number of shopping trips and amount spent have changed in
the past two years. In 1997, 38.1% of consumers shopped at discount stores four to eight times
per month. In 2000, 44.3 % shopped two to four times per month, and 32.3% shopped five to ten
times per month (Sul, 2000). In 1997, 42 % of consumers spent 50,000 won (US $42) to 100,000
won (US $83) per visit. In 2000, 35.8% spent 30,000 won (US $25) to 50,000 won (US $42) per
visit, and 34.8% spent 50,000 won (US $42) to 100,000 won (US $83) per visit (Gu, 1998; Sul).
As found in the previous sections, continuously changing environments influence consumers’
demographics and in turn, consumers’ demographics affect their shopping orientation.
Overview of the Spiral Evolution of Discount Stores
As environments continued to change, discount stores needed to respond appropriately
by changing their store attributes. Favorable environments increased the growth of the discount
store type but have then increased competition not only among discount stores but also among all
retail institution types in South Korea (Kim, 1999). As many discount stores have opened since
the economic crisis in 1997, the South Korean retail market has become saturated. High
competition and recovering economic conditions negatively influenced the sales growth of
discount stores. This finding was partially in support of the processes discussed in the CREM.
Competition as described in the CREM affected the evolution of discount stores. Continuously
changing economic environments influenced the evolution, but additional relationships among
these variables were supported as discussed in the previous sections.
Although discount stores have been in South Korea for over five years, many discount
stores still lack adequate management systems and skills. For example, lack of an inventory
management system, lack of non-systemized product order and display, unstable relationships
with manufacturers, and lack of operation systems are prevalent problems with this retail
institution type (Jeong, 2000; Lee, 1996; Lee, 2000; Ok & Kim, 1997). The reason might be the
gap between the management system and skills in developed countries and in developing
countries. The import of the system from advanced countries is not always applicable in the
developing countries. Because of the different retail environments, some systems may be
difficult to implement. Cultural differences in adoption of technologies and management changes
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are well documented in other fields (Engle, Blackwell & Miniard, 1995; Sethi, 1971). Due to
lack of management systems and “know-how”, operating costs have generally increased except
for a few years as discussed previously (Jeong, 2000). Operating costs increased from
W3.7billion in 1995 to W9.1billion in 2001. The operating costs increased almost 250% within 6
years, resulting in the increase of retail prices of both imported and domestic products. Other
evidence of inadequate operating systems is that product flow became unstable in the early 2000s
(Lee, 2000). Therefore, not only the retail maturation but also the lack of operation systems and
skills affected the increase in operating costs. According to the phases diagrammed in the
CREM, discount stores now needed to be renovated to differentiate themselves from their
competitors including other domestic and foreign discount stores and department stores (i.e.,
conflict between R1 and R2 in the Figure 4.1). The data supports this need for change as
predicted in the CREM. Other data that provide a clue for the need of change is that when the
economy has recovered, consumer preference for discount stores seemed to be decreasing, as
shown in the decreasing sales volume. In addition, sales proportion of some product categories
show inefficiency regarding the space allocation in discount stores (e.g., apparel product - around
10% out of total sales), and consumers’ satisfaction with quality and product assortment was
somewhat low (Gu, 1998).
To be competitive, discount stores should be evolving and changing their characteristics
(i.e., spiral evolution of R2 in the Figure 4.1). Further evidence of this phase orientation to the
evolutionary process is that discount stores have reorganized their merchandise assortment, and
are offering more high-quality merchandise and providing products with up-to-date fashion
trends and good value, in addition to providing lower-priced products (Kim & Chen-Yu, 2003;
Lee, 2000). Some discount stores launched their own private brands. The wheel of the discount
stores has started and is expected to be a spiral evolution according to the CREM (see Figure
4.1).
Conflict between Department Stores and Discount Stores
The CREM proposes that while two types of retail institutions individually and spirally
evolve, they influence each other as a competitor (i.e., conflict between R1 and R2 in Figure 4.1).
At some point in this evolution, these two institutions are perceived by consumers as conflicting.
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Consumers find that they are not satisfied with either of these two retail institutions. In addition,
the two institution types may be losing profit rate, decreasing in market share, or otherwise
exhibiting loss of financial success. Because of the conflict, according to the CREM, a new retail
institution emerges by combining the characteristics of two retail institution types or by creating
new characteristics that better fit to changing environments and consumers’ tastes.
Verification of this CREM process was sought through the constant comparison method
in evaluating the data from South Korean retailing and the CREM. Several authors have
examined conflict between retail institution types in previous literature and have noted multiple
variables that could be used in this examination. Oren (1989) selected the following factors to
show the differences between retail institution types and originate the conflict: fulfillment
process, prices, trading area, product variety, inventory required, communication medium,
delivery time, marketing concept, type of relationship with other channel members, segmentation
efficiency, segmentation size, and value of customer. To identify the conflict between retail
institution types, Levy and Weitz (2000) also compared characteristics of retail institution types
and selected services (e.g., personal shopping, credit, in-store baby sitting, delivery), product
variety and assortment, prices, sizes, SKUs, location (e.g., center business district, out of urban
area), and organizational structure (e.g., number of staff and administrative positions, a structure
or steps of administrative/supervisory).
In South Korea, department stores and discount stores have been competing with each
other since the economic crisis because both department stores and discount stores have unique
characteristics that differentiate each from the other. Many of the variables used in previous
studies can be examined in evaluating the data collected about the retail situation of South Korea
(see Table 5.18). For example, the price strategy in department stores is middle to high level,
while that of discount stores is as low as possible. Department stores in South Korea mainly
focus on a high level of services (e.g., educated sales people, personal credit, delivery, gift
wrapping) and facilities (e.g., bank, playground, exhibition, hospital, hair shop) to serve
customers, who pay for both merchandise and service (Lee, 1996). In addition, consumers expect
high levels of quality in department stores. On the other hand, discount stores in South Korea
minimize services and facilities and try to keep the quality acceptable compared to the price (Ji,
1995; Pak, 1998). Department stores carry more variety and deeper product lines than discount
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stores, especially within apparel classifications. Discount stores mainly carry high turnover
commodity goods for daily life (Ji, 1995).
Table 5.18. Comparison of Characteristics between Department Stores and Discount Stores
Characteristics Department Stores Discount Stores Price High price to average Low price Service Various services Self selection service Quality Medium to high product quality Good quality Variety Various Less various Assortment Deep to average Average to shallow Promotion Various promotion Minimum promotion Location Center business district Out of center business district Margin High margin 50% Low margin 20-30%
Department stores use various types of media to promote stores and products, and these
high promotion costs are included in product prices, while discount stores try to reduce the
promotion costs so that they can focus more on low prices, from low operating margins. In
addition, discount stores minimize laborers, and succeed in having one-fifth of the number of
laborers as used in department stores, again to keep the price low (Lee, 2000). Department stores
are mostly located in a center business district, while discount stores are mostly located outside
of a center business district (i.e., newly developing suburban). To cover the high land cost for
this downtown location, additional costs contributing to high margins were necessary for
department stores. Department stores usually keep around 50% of retail price for a margin to
cover all costs, while discount stores can manage with 20 to 30% margins (Ji, 1995). These
findings support the CREM where it shows that two retail institution types can simultaneously
exist with differing characteristics.
The data were examined to determine if the social, technological, economical and legal
environments favored department stores, to determine when these environments became an
obstacle or a negative environment for the growth of department stores, and to identify what
changes or evidence exists to support the spiral evolution. With negative environmental
influences including environmental and consumer changes and competition with discount stores
(i.e., conflict between R1 and R2 in the Figure 4.1), department stores started evolving to adapt
themselves to these changing environments. This situation was proposed in the CREM and
supported by the data discussed in previous sections; however, the CREM also proposes that if
conflict is too great or the change is not quick enough, a retail institution type will not satisfy
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consumers’ changing needs and wants, leaving room for the introduction of a new retail
institution type. This situation is exemplified in the data where high competition within
institution and with discount stores resulted in profit loss, and bankruptcies (Kim, 1999; Lee,
2000). Starting from two department store bankruptcies in 1995, the number of bankruptcies
increased (i.e., 1996-4, 1997-13, 1998-5). Since 1997, discount stores took over the popularity of
department stores and became the most attractive retail institution in South Korea; however, as
the economy is improving since 2000, data in sales show that discount stores also started losing
their attractiveness (i.e., price competitiveness) to consumers. This data shows the same patterns
that are proposed in the CREM, patterns such as changing environments and evolving
competitive store types that have the potential for the spiral evolution in current store types, or
the introduction of a new institution type.
Through the spiral evolution of department stores and discount stores, consumers’
preference for store/product attributes in both retail institutions appeared to change according to
the environmental changes. Department stores and discount stores in South Korea have taken,
since their importation, a position on extreme ends of the classification scheme in terms of
store/product strategies. Department stores positioned in the high level and discount stores
positioned in the low level in that scheme. Consumers acknowledged that product quality and
services that department stores provided were satisfactory when the environmental conditions
were economically positive, but prices that discount stores offered were desirable when
economic conditions were negative. The economic environment improved in the post-crisis
years, and department and discount stores were no longer “new” or innovative, or even mature
institution types. At this point in the retail evolution process within South Korea, within one
retail institution type, consumers were not satisfied by finding all store/product attributes in one
retail institution type that they considered when shopping. This unsatisfactory shopping
experience and the aging of the present retail institution types opened a space for a new retail
institution type to emerge.
Emergence of a New Retail Institution
Private-Branded Hive Type of Retail Institution (the PBH)
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To meet consumers’ needs in quality, services, fashion, and price, a new retail institution
type emerged in 1998 to instant consumer interest (i.e., R4 in the Figure 4.1). This emergence is
the result of conflict predicted in the CREM. This type of retail institution is not a globally
acknowledged type of retail institution, and no official name yet exists. In this study, this new
institution type will be designated as a Private Branded Hive (PBH). The PBH provides the
desired quality level and fast new fashion with low prices, combined characteristics that were
previously missing in either department store or discount store types (Kim, Choi, Song, & Jeon,
2000). In South Korea, because the PBH meets consumers’ needs, the PBH is highly successful
and widely accepted by current retail consumers. Changing economic conditions also
considerably accelerated the success of the PBH. Therefore, the main influences of the success of
the PBH are changing consumers’ demands and economic conditions. Because the PBH is
recently emerged, this retail institution type is not independently categorized in retail textbooks
and other sources, like department stores and discount stores, and government statistics are not
published yet on this retail institution type. All statistics and information regarding the PBH in
this section are drawn from publications from trade journals and magazines.
Background of the PBH
The first PBH that appeared in 1998 was named Miliore - a building name - and was
seven stories. This PBH opened in the Dong Dae Moon district (DDM), which has historically
been the center of the traditional apparel wholesale market in South Korea (Kim, Choi, Song, &
Jeon, 2000; Kim & Shin, 2000). DDM consists of thousands of small traditional street stores and
larger buildings for wholesaling and retailing. Since the Miliore was constructed, many PBH
buildings have appeared (e.g., Doo-San Tower, Preya Town), especially within DDM, imitating
the operation system and the characteristics of Miliore (Kim, Choi, Song, & Jeon). As the
number of PBH buildings increased and the PBH was quickly accepted by consumers, this type
of retail institution became a leader of South Korean apparel retail institutions and a mecca of
fashion in South Korea. The PBH has become representative of DDM and South Korean apparel
retailing.
Inside a PBH building, more than 2,000 booth-style stores sell their own private-branded
apparel items, which are normally named after their individual store name. A PBH normally
occupies a five-to-ten-story building, and each floor has a category theme, in other words, stores
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on one floor carry the same merchandise category. For example, the 1st floor carries accessories;
the 2nd floor carries lady’s clothing, including casuals and suits; the 3rd floor carries men’s
clothing; the 4th floor carries shoes; the 5th floor carries children’s clothing; and the 6th floor
carries imported apparel items. This categorization is similar to department store layouts but
contains stores instead of departments so that the volume and diversity of products is more
extensive. The PBH provides all apparel merchandise categories, so that consumers can enjoy
one-stop shopping (Kim, Choi, Song, & Jeon, 2000). The sales volume of one store/booth in a
PBH building is an average $120,000 per year, averaging $10,000 to $12,000 per month (Shin,
2001), which includes exports mainly to China, Russia, Southeast Asia and Japan (Im & Pak,
2001; Kim & Kim, 2001).
Within a big modernized building, convenient facilities such as elevators, escalators, rest
rooms, dressing rooms, food courts and sophisticated interior design and lights are provided
(Kim, Choi, Song, & Jeon, 2000; Kim & Shin, 2000). In addition, the PBH provides quality
services (i.e., return/refund, a customer service center, sales personnel, and credit) to customers
who are accustomed to the service level of department stores (“Doo-San Tower,” 2001; Kim,
Choi, Song, & Jeon; “Shopping mall,” 2001).
Cyclical Evolution of the PBH
The PBH is the most recent and successful retail institution type in South Korea;
therefore, according to the CREM, the PBH would be at the beginning of its evolutionary wheel.
No description or evidence of modification of the characteristics for the PBH was found in any
research and trade articles, which supports the supposition that the wheel of the PBH has not
begun. The PBH is the new retail institution type that emerged from the conflict between the
previous retail institution types. The following paragraphs will present data on the current
characteristics of the PBH, including operational variables that are examined when analyzing
evolution of a retail institution type. This background will provide a foundation for future studies
of the PBH.
To manage the needed quality services, the PBH operates the floor manager system
(Kim, Choi, Song, & Jeon, 2000; “Shopping mall”). Each floor has a manager, who supervises
store services. Although most retail stores close by 9pm, the PBH is open from 9am to 6am the
next day, thereby providing a shopping place for consumers who want to shop after 9pm (Kim,
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Choi, Song, & Jeon; Kim & Shin, 2000). This is a highly successful service provided only by the
PBH. The PBH also provides services to store/booth owners. The management of the PBH
buildings operates an office for export business to assist their store/booth owners, who want
international trade, so that foreign buyers, especially, can contract directly with the PBH
store/booth owners without involving a separate buying office or wholesaler (Kim, Choi, Song,
& Jeon). Some PBH buildings also have a fashion information center to help with their
store/booth owners’ and designers’ product planning. The PBH provides store/booth owners
promotion opportunities via a public relation center (Kim & Shin).
The PBH uses all types of promotions activities including a wide variety of media (e.g.,
TV, magazines, fashion shows, Internet website) to promote their stores (Kim, Choi, Song, &
Jeon, 2000). Some stores in the PBH utilize Internet shopping malls, thereby extending their
sales route into cyberspace (Kim & Shin, 2000; Lee, 2000). Some of the PBH businesses enter
foreign markets by opening buildings in Taiwan and Japan with their own building names (“The
fifth fashion,” 2001).
The training and skills of the PBH store owners further influence the success of the
PBH. The PBH removes wholesalers, by assigning multiple tasks to one person (Kim, Choi,
Song, & Jeon, 2000). For example, a store owner handles product planning and design because
many store owners are designers. This educated owner also uses efficient management practices
for store operations. A store owner/designer purchases raw materials and orders products from
the manufacturer. A store owner/designer checks product quality and displays the product in the
store; therefore, a store owner does the jobs of a product planner, a designer, a merchandiser, and
an accountant (Kim & Shin, 2000). The PBH can reduce labor cost, which is the major
proportion of operation and production costs. When a store owner/designer purchases raw
materials and final products from manufacturers, he/she further reduces the cost by a cash
discount. Also, real-estate costs can be reduced because the store serves multiple functions. For
example, a store is used for an office, a distribution center, a trading center, and a place for
inventory stock. All activities are possible in one small booth-type store because the PBH carries
a small amount of inventory. The stores in the PBH reduce cost by 80.0%, at most, compared to
department stores.
The product assortment is managed differently in the PBH than in other retail institution
types. To obtain a wide assortment of fashion forward products, more than 1,500 designers work
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in the PBH (Kim, Choi, Song, & Jeon, 2000). Most designers in the PBH are young and highly
educated. They have a college degree, which specialized in apparel design, and many of them
studied in France, Italy, the United States, or Japan (Kim, Choi, Song, & Jeon). Some designers
own their own stores in the PBH. Using these in-store designers, the PBH stores achieve Quick
Response (QR) and apply new fashions easier than stores that utilize a separate designer. The
designs are very high quality and highly competitive, compared to designs in other retail
institution types (Lee, 2000). The PBH management holds design contests, selects the best-
qualified new designers, provides them an opportunity to open a store in the building, without
any financial obligation, and supports their fashion shows (Lee).
In the PBH, the lead-time from product planning to display is an average two days (Kim
& Shin, 2000; Lee, 2000). For example, a product is created or developed and raw material is
purchased at 8am; manufacturing starts at 11am, and finishes at 10pm; product Quality Check
(QC) is conducted at 6am the next day; packaging and documenting is done at 7:30am; and
finally, delivery is begun at 9:30am (Lee, 2000). The display will be completed by the afternoon
or night of the same day. Traditional apparel companies, whose lead-time normally are one and a
half to three months, and whose pipeline is geographically and functionally diverse would find it
difficult to compete with the PBH in terms of QR (Kim & Shin).
When a product arrives at a PBH store, products are displayed at stores at the right
moment. If a new item elicits a positive reaction from customers within a day, the item will be
reordered and displayed for three to four more weeks (Kim, Choi, Song, & Jeon, 2000; Kim &
Shin, 2000; Lee, 2000). If consumers do not show interest in an item, the lifecycle of the item is
one to several days, and designers in the PBH are required continuously to create new designs or
develop different items.
Currently, the PBH management also provides a delivery service to Japan to improve the
supply chain. Because Japan is a two-hour flight distance from South Korea, products can be
delivered within one day. The unique feature in this international delivery is that a professional
deliveryman, called a ‘Hakobi’, personally carries products and flies to Japan (Kim, Choi, Song,
& Jeon, 2000; Kim & Shin, 2000). He delivers products to an owner or a store and helps them
with product displays. All legal documents and deliveries are completed by the delivery service
of the Hakobi. This service saves delivery costs as well as delivery time.
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Uniqueness of production process and QR in the PBH. The process of production in the
PBH, from product planning to display, is unique compared to the process incurred in traditional
apparel manufacturing and retail companies. This operational characteristic of the PBH supply
chain has the potential to affect many aspects of the evolution of this retail institution type. At
the product planning stage, traditional apparel companies have a hierarchical structure in
decision making (Kim, Choi, Song, & Jeon, 2000; Regan, Kincade, & Sheldon, 1998). When a
designer creates new designs, a manager or decision-making group needs to approve final
designs. Then, the final designs need to be approved by a final decision maker, such as a
director, a CEO, or an owner. If a final decision maker wants to modify the final designs, the
designs are returned to a designer and need to go through all decision steps again. At the product
planning stage, several separate departments participate in the final decision. Thus, the time and
effort spent at this stage is considerable. The product planning of the PBH is simpler than that of
traditional apparel companies that supply department and discount stores.
In a PBH retail institution, many store owners are designers themselves (Kim, Choi,
Song, & Jeon, 2000; Kim & Shin, 2000; Lee, 2000). If not a designer, store owners hire a
designer, or they purchase products directly from manufacturers who develop their own products
to sell to retailers. A designer/store owner creates and decides on final designs in one step.
He/she controls the entire production process, from design to display, single-handedly. Most
designers in the PBH are well-educated in the apparel field, are well-experienced, and are
capable designers, collecting information from Paris, Milan, Tokyo, and London and applying
that information to South Korean consumers (Kim, Choi, Song, & Jeon; Kim & Shin). Without
passing through multiple steps with many separated departments, a company that operates in a
PBH has a shortened time for product planning.
After deciding on the final designs, a designer needs to purchase raw materials (Regan,
Kincade, & Sheldon, 1998). Traditionally, apparel companies search for the right materials in the
market, or they order them from manufacturers. Until the exact materials for the final designs
can be produced, apparel companies and manufacturers give and take their requirements and
samples. On the other hand, in DDM, thousands of traditional street stores for raw materials are
located within walking distance from the PBH (Lee, 2000). For example, one five-story building
in DDM, containing hundreds of small wholesale stores, sells only raw materials. The PBH
designers and owners can purchase fabrics, threads, buttons, labels, zippers, snaps, laces,
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padding, plastic store bags, and packing boxes and bands within a two-kilometer radius of the
PBH. Quick decision making and direct purchase from raw-material stores save considerable
time.
Next, a designer brings the final designs and raw materials to the manufacturers (Lee,
2000). More than 2,000 small manufacturers are located within two kilometers of the PBHs in
DDM. These manufacturers are mostly family-owned, and are able to produce from a sample to
a large amount of re-order products (Kim, Choi, Song, & Jeon, 2000; Kim & Shin, 2000).
Laborers are mostly family members and relatives, who do not work under the regulation of a
working-hour limit. They can work anytime, whether weekend, day or night; therefore, these
manufacturers are highly successful at making due dates, because of high flexibility in labor and
working hours. The high flexibility works well with QR in fashion goods, which requires fast
turnovers (Kim, Choi, Song, & Jeon). Manufacturers can finish within six hours of patterning,
cutting, and sewing. They take orders of, at minimum, 80 to100 items per style. Traditional large
manufacturers, on the other hand, accept orders of a minimum 1000 items per style. Both
manufacturers and retailers can reduce inventory investments for materials, labors and inventory
management costs in the PBH.
At this stage in the supply chain, a designer discusses with a manufacturer the fit
between designs and raw materials. A designer either brings patterns to the DDM manufacturers
or makes patterns with manufacturers who have a pattern maker (Lee, 2000). A decision,
regarding whether manufacturers can produce the products matching a designer’s requirements,
is made within a few hours of the designer’s visit to a manufacturer because two final decision
makers from each designing and manufacturing side directly discuss the issue with the final raw
materials and the final pattern in front of them, saving large amounts of lead-time.
After finishing production, products are delivered to a designer/store owner in a PBH.
The delivery of traditional apparel companies starts with loading products to trucks or containers
from a manufacturer. If products are for domestic consumption, trucks deliver and unload them
to a distribution center. Then, trucks reload products and deliver them to individual stores. If
products are for international trade, products are loaded to containers and delivered to an airport
or port for shipment (Pelton, Strutton, & Lumpkin, 1997). The delivery and distribution system
for a PBH is simple and fast because many steps that traditional apparel companies take are
removed (Kim & Shin, 2000). Products are delivered from the hands of a manufacturer to the
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hands of an owner. The hand-to-hand delivery results in maximum accuracy of delivery. Because
of the small number of items and the proximity between a manufacturer and the PBH, most
deliveries are conducted by what are called auto bikes, a quick service delivery. Delivery can be
finished within an hour.
Environmental Influences on the PBH
In the CREM, environmental influences are assumed to affect the emergence of the
PBH. The changing environments discussed in the department store and discount store sections
not only influenced the evolution of department stores and discount stores but also provided a
ground for the emergence of the PBH. The following sections will discuss how environmental
influences helped to form the characteristics of the PBH.
Social and economic environments. Seoul is one of the cities that have the highest
population density in the world. In addition, the DDM area is the center of public transportation
systems. These social environments helped the PBH to reach consumers and consumers to access
the PBH easily. Also, because DDM has been known for the center of wholesaling and retailing
of apparel industry in South Korea, the PBH could serve not only the Seoul area but also large
local cities nation wide. As the coverage area is much broader than any other retail institution
types, the success of the PBH was promised.
An economic change (i.e., economic crisis) favored the instant success of the PBH for
many reasons. Many big apparel companies have been without sales since the economic crisis;
therefore, many laborers, including designers, were unemployed. The high unemployment was a
main reason why designers, who worked for big apparel companies, opened their own businesses
or went to work for stores in the PBH (Kim, Choi, Song, & Jeon, 2000). The quality and design
of products were assured in the PBH because of these well-educated apparel experts. The
economic crisis provided the positive background for the PBH to emerge as serving consumers’
need for low priced quality products.
The improving economy also positively affected the PBH, as consumers no longer
wanted to purchase apparel products in discount stores due to increasing disposable income. As
shown in the Table 5.8, 5.10 and 5.11, the unemployment rate was decreasing since 2000, and
GNI and household income recently started increasing. This influence of the economic
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environment on consumers’ demographics was not predicted in the CREM but was commonly
found in the department store and discount store sections. Even though household income based
on CPI showed that the income level came back to the level before the economic crisis, GNI has
not returned yet to the level before the crisis, and consumers have not return to their identical
shopping behavior before the crisis. Consumers normally restrain their spending when they
expect the decrease in income in the near future, even though the income is not actually
decreased yet (Engle, Blackwell & Miniard, 1995). Therefore, consumers have not wanted to
spend yet much money in department stores, because of the uncertain future of economy, but
want more quality and fashionable items. This post-economic crisis environment also helped the
success of the PBH because the PBH met these consumers’ needs and wants. This impact of
consumers’ demographics on their shopping orientation and the reciprocal influence between the
consumers and the PBH was predicted in the CREM. These influences of environments on the
retail operation and consumers’ shopping orientation were also identified in the previous
sections.
Geographic environment. The geographic environment is a primary influence to make
the PBH unique and successful by achieving QR and price reduction. The PBH opened in the
Dong Dae Moon district (DDM), which consists of thousands of small traditional apparel street
stores (Kim, Choi, Song, & Jeon, 2000; Kim & Shin, 2000). In 2000, around 2,700 apparel-
related stores and over 20,000 small apparel manufacturers were located in DDM (Kim, Choi,
Song, & Jeon). All segments of the industry, required to complete one, apparel product, are
located in DDM; therefore, DDM is called a Fashion Valley (Kim, Choi, Song, & Jeon). This
unique geographical proximity among channel members (i.e., design offices, raw material and
fabric stores, manufacturers, distributors, and retailers), which is possible in DDM, allows the
PBH to have a unique QR system (Kim, Choi, Song, & Jeon; Kim & Shin; Lee, 2000). Through
this QR system, the PBH greatly reduces lead-time and costs in each step of the production
process (Kim, Choi, Song, & Jeon; Kim & Shin).
As a further example of the geographic influence, DDM has historically been known as
a traditional apparel wholesaling area. DDM already had loyal wholesale and retail customers
(Lee, 2000). In addition, DDM was famous for its foreign buyers, from Russia and Southeast
Asia. Because foreign buyers have been doing business in DDM, they knew the product quality
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(Kim & Shin, 2000; Pak, 2000). The traditional reputation of DDM products, and the existing
loyal customers, helped the PBH to quickly secure consumers’ trust in product quality.
Political/legal environment. A PBH provided highly attractive characteristics to both
domestic and foreign consumers and achieved high sales success. Accordingly, the DDM area
became one of the most attractive tourism areas, embedding its own unique traditional market
characteristics. In addition, the South Korean government officially designated DDM as a
national tourism area. This governmental action provided support to the area so that more foreign
businesses and tourists can visit DDM area and accelerated its economic revival (Park, 2000). To
respond to this changing environment, the PBH quickly prepared several operational activities.
The PBH made shopping guide booklets to promote themselves and provide them to airports and
hotels. Also, the PBH started providing in-store announcements in five different languages and
store guides who speak a foreign language. The PBH tried to upgrade facilities and fix prices for
foreign buyers, who are not accustomed to bargain at the moment of trading/purchasing
(“Famous tourism areas,” 2002). Therefore, the political/legal environment directly affected
retail activities and operation of the PBH. This reciprocal relationship, which is the influence of
environments on the entry phase of the cycle and the influence of a retail institution on
environmental changes, was not predicted in the CREM.
Consumer Influences on the PBH
One consumer trend that has changed drastically, since the economic crisis, according to
researchers and analysts, was consumers’ consumption patterns and shopping orientations (Kim,
Choi, Song, & Jeon, 2000). Prior to the economic crisis of 1997, consumers purchased high-
fashion brand-name products in department stores, regardless of their financial status.
Consumers had a strong loyalty to department stores for high quality, fashion, and services. After
the economic crisis, consumers had to be careful when and where they spent their income. More
consumers were looking for value for money, not high-priced, brand name products. Consumers
were willing to spend time and effort to search and compare information to find the products best
suited to their changed circumstances (i.e., decreased income). With the crisis, consumers
developed a more practical consumption pattern (Kim, Choi, Song, & Jeon), and discount stores
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became the appropriate retail institution type for consumers. More consumers chose discount
stores as their prior retail institution type after the economic crisis.
However, consumers were accustomed to high quality and fashionable items and
services in department stores until 1997. As the economic crisis of 1997 came to a close,
consumers were looking for services and quality fashion items with low prices; however,
department stores could not offer low prices compared to the level of products and services they
offered, and discount stores could not provide a certain level of services and high quality fashion
items compared to the level of cost they offer (Lee, 2001). The PBH emerged at the right time,
when consumers were looking for a new solution. To meet the improving living standard in
South Korea and consumers’ increasing demands for improved products and services, the PBH
provided a convenient shopping environment with high quality, fashion oriented products (Lee,
2000; Kim & Kim, 2001). This finding supports the influence of consumers’ behavior on the
emergence of a new retail institution type as diagramed in the CREM.
In South Korea, 200,000 to 300,000 customers per day visit the PBH buildings,
including 2,000 foreign visitors per day from Japan, Taiwan, China, Hong Kong, Russia, South
Africa, Central Africa and the United States (Kim, Choi, Song, & Jeon, 2000; Kim & Shin, 2000;
Kim & Kim, 2001; Lee, 2000; Shin, 2001). Target consumers of the PBH range in age from
teenagers to those in their early 30s (“Dong Dae Moon,” 2001; Ha, 2001; Kim, Choi, Song, &
Jeon; Kim & Kim; Pak, 2000). The teen-to-30s age group is the major consumer group for
apparel retailing (“20s in department stores,” 2001). These consumers are highly sensitive to
fashion and are willing to spend most of their income for clothing. As the PBH meets
consumers’ expectations in the shopping environment, the PBH increases its competitiveness, at
the same time, especially with department stores. In addition, the design of the PBHs’ buildings
revised consumers’ image of DDM, which had been known for a dense area of small, non-
organized, traditional street stores (Kim, Choi, Song, & Jeon; Lee).
Family structure and population age profiles are consumer demographics with potential
to influence a retail institution type. As the number of full-time working parents increased,
consumers preferred the one-stop shopping environment. Consumers spent more time on leisure
than shopping. As consumers have gotten older, they tended to spend less money on clothing. In
contrast, teenagers have tended to purchase clothing with money from parents or part-time jobs.
These consumers in their 20s and early 30s usually have jobs and an independent, disposable
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income. By targeting teens to early 30s, the PBH targeted the right age group for fashion forward
apparel and provided store environments and product mix appropriate to this age group, such as
the latest fashion items, loud background music with music videos, and a variety of events and
entertainments (Kim, Choi, Song, & Jeon; 2000). The PBH became the preferred meeting place
for this age group to interact and communicate with each other. Therefore, the influence drawn
from consumers’ demographics, shopping orientation and preference for store/product attributes
in the CREM is supported.
Overview of Conflict and Evolution of the PBH
Some modifications of other retail institution types have been found that were the result
of their conflict with the PBH, as described in the CREM (see Figure 4.1) in the confliction
between R4 and either R1 or R2 or both. Many small and mid-size department stores could not
compete with the PBH. In response, they renovated their stores in the style of the PBH buildings,
imitated characteristics of the PBH, and specialized only in apparel merchandise (Jeong, 2001).
This finding supported the CREM’s spiral wheel of department store evolution resulting from
conflict and time. Also, management in big department stores realized that the PBH was
achieving a higher sales growth rate than major department stores (e.g., in 2000: department
store 20.1% versus the PBH 676.7%; in 2002: department store -3.8% versus the PBH 21.9%)
(The report for retail operation and trend, 2001, 2003; Financial Report, 2003). In 1999, Miliore,
the first PBH, achieved an annual total sales $670million, in comparison to $117million annually
per department store. Some of these traditional department stores opened a department within
their stores for the PBH brand items, or a department for discounted items and low-priced
private-brand items to compete with the PBH brands. Discount stores have tried to carry more
fashionable items to “keep up with” consumers’ fashion interests and to compete with the PBH.
As is proposed in the CREM and is supported with the data, when a retail institution
type achieves a significant sales success, many similar stores open imitating the operation
practices, and the number of stores increases accordingly. Even though a spiral wheel of the PBH
should not have started yet, many retail investors, including owners of the PBH in DDM, opened
a PBH not only in the DDM area but also in other areas in South Korea. However, even though a
PBH type of retail institution has high potential of significant success, implementation of the
PBH in other market places may be limited and the success may be uncertain. The market place,
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where the PBH can be opened, must have similar environmental influences and competitions, for
example geographical proximity among channel members, the same as the PBH in DDM, South
Korea. In those other areas, the unique characteristics of the PBH cannot be duplicated without
the geographical proximity in DDM. Fast QR and low prices cannot be achieved in those areas,
because the PBH is functioning only as a retailer, who purchases products from wholesalers or
manufacturers in DDM and delivers to local consumers. Only DDM has the unique geographic
proximity, which was built historically and traditionally. Retailers in New York City in the
United States did have a similar geographical proximity of the entire textile, apparel and retail
industry; however, the labor cost and real estate costs in New York have increased considerably,
and channel members, who once were geographically close, have been dispersed.
On the other hand, in another aspect, the PBH can be successful anywhere as long as the
geographic proximity among channel members is achieved or simulated. The apparel industry is
a cottage industry (i.e., small scale of channel members) and a labor-intensive industry. For these
reasons, movement of small size of manufacturers, raw material stores and retailers, and laborers
is easer than other industries, which need complex and expensive set-ups and movement costs
due to heavy equipment and a large scale of working space. In addition, the increasing
complexity of computer technology to aid the design and manufacture of apparel materials may
allow some geographic proximity to be approximated. Technology may be the driving influence
behind another successful PBH. Using the CREM to predict the outcome of future change and
effects of influence, the PBH can be predicted to be a prosperous retail institution type anywhere
in the future; and can be imported to other geographic regions, where labor and raw materials are
easily accessible and channel members move into one place to form a type of DDM and where
they are geographically or technologically close to a dense population demanding high fashion
goods.
Several problems of the PBH, which need to be solved for continued financial success,
may soon initiate the movement of the wheel, as proposed from the CREM. First, because the
PBH is located in the middle of the center business district, the DDM in Seoul, and all types of
transportation systems have been developed to service this area, high traffic congestion restrains
some consumers from visiting frequently (Kim, Choi, Song, & Jeon, 2000; Lee, 2000). Second,
some services, especially refund or return policies, are not satisfactory for most consumers
(Choi, 2001; Jang, 2000; Lee, 2001). For example, consumers have a hard time to return
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products because store owners are reluctant to refund or accept returned products because of
small profit margins and changing product lines. Third, because of the fast turnovers and
frequently changing designs, product quality control is not always thoroughly conducted;
therefore, consumers complain about product quality (Jang; Jo, 2001; Lee). Fourth, prices in the
PBH are not fixed. Consumers can bargain for product prices, which means that consumers
distrust prices that store owners offer (Lee). Lastly, this PBH type of retail institution first
appeared in 1998. Since then, the PBH has been a highly competitive and prosperous retail
institution type. At the same time, the number of the PBH-style retail institutions has increased,
and other existing retail institution types have imitated the PBH and offered the same
characteristics. The PBH retail institution type is being saturated in the market (Jo; Kim, 2001;
Choi). According to the CREM, South Korean consumers may begin looking for another new
retail innovation, to solve the problems they find with the PBH (i.e., R5 and a repetitive process
of Retail Evolution in Figure 4.1).
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CHAPTER VI
MODEL REFINEMENT, SUMMARY AND CONCLUSIONS,
IMPLICATION, AND RECOMMENDATIONS
Historically, many researchers have endeavored to find a pattern in all retail evolution
and to propose a theory with a graphical model. However, most retail evolution studies have
been conducted in the United States and in Europe. To study South Korean retail evolution, an
appropriate theory that can be applied to South Korea and a synthesis of other research findings
about past retailing in South Korea were needed; however, no comprehensive work has been
done regarding the evolution of South Korean retailing.
The purpose of this study was to examine the evolution of retail institution types in
South Korea and to build a model, which more fully explains retail evolution. A qualitative
research design, specifically, a modified grounded theory type of design with a constant
comparative method was employed in this study. To proceed with this study, retail evolution
theories, which were commonly recognized as the primary theories, were reviewed. These
theories were the Environmental theory, Cyclical theory, Conflict theory, and Combined theory.
Then, the CREM was proposed by synthesizing these retail evolution theories for a better fit to
all types of retail evolution. Although these theories have been used in some form since the
1950s, they have never been used to explore the development of retailing in South Korea. Three
retail institution types in South Korea were selected and analyzed for retail evolution based on
the Combined Retail Evolution Model (CREM) proposed in this study. The data about retail
institutions in South Korea were collected from government offices, trade and industry
associations, public libraries, and websites on the Internet and were analyzed to find a pattern of
retail evolution.
In this chapter, the CREM is revised based on the analysis, and the final CREM is
proposed. In addition, summary and conclusions, implications, and recommendations for the
future are included in this chapter.
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Model Refinement
The CREM is a two-part model that includes (1) a retail evolution portion containing a
cyclic and spiral evolution and the conflict process and (2) the environmental influence portion
containing multiple environmental influences and a section on consumer influences (see Figure
4.1). Three major principles are proposed in the CREM: (a) rhythmical patterns of spiral change,
(b) the effects of conflict or challenge from competition, and (c) the influence of retail
environment. Using a constant comparison analysis with the proposed model and data about the
retail environment in South Korea, the CREM was refined. The relationships among variables
that were supported by the results were confirmed and remain as shown as the same type of lines
in the CREM. The partially supported cycles are shown with a circle with dashes and dots, and
the non-supported relationships are marked with Xs in the revised CREM, (see Figure 6.1), but
are removed in the final CREM. In addition, new relationships that were found are added with
bold lines with dashes and dots in the revised CREM. The process of revising and finalizing the
model provided the information to address Research Question 2: Can the retail evolution process
in South Korea be completely explained by the retail evolution theories. As indicated by the
revisions described in this paragraph, the answer to this question is no. Further explanation of the
revisions and the final model are given in the following sections.
Retail Evolution
The retail evolution portion of all the CREMs graphically shows both the principles of
the rhythmic and spiral change through the evolution process and the effects of the conflict with
other institution types. The one cycle in the retail evolution process in the original CREM
contained three phases: (a) entry (or introduction), (b) trade-up (or mature), and (c) vulnerable.
In addition, the spiral evolution moving to a higher level within a retail institution type was also
included. The conflict among retail institutions was predicted to create a new retail institution
type. Overall, two principles of rhythmic and spiral change and conflict among institution types
were supported; however, the exact shape, timing, and relationships of and among the changes
and variables varied between the data and the original CREM.
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d
a b c
R1 R2
R4 R5
R6
Environmental influences
Consumer’s preference for store/product attributes
Environmental influences
Consumer’s preference for store/product attributes
R3
Retail Evolution
Figure 6.1. Revised Combined R
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R1 = retail institution types
Supported, First Wheel
Relationships not supported
a-f New Relationship Partially supported spirals Second Wheel
fe
Shopping orientation
Demographics
Shopping orientation
Demographics
Product Situation
Product Situation
Influences
etail Evolution Model
Phases of the Retail Evolution
In the retail evolution process of the original CREM, the model proposed that in one
cycle of the process a retail institution type matures from the entry phase to the vulnerable phase.
During this maturation, the institution type makes many changes within its operating structures,
as noted in Chapter 4 in the section on Patterns of Spiral Change and Conflict. For example, a
retailing institution type that is in the trade-up (or mature) phase should experience increases
with its operating costs and product prices, accordingly. In the final phase (i.e., vulnerable
phase), the retail institution loses its competitiveness in the market, as reflected in drops in sales
and profit, and finally allows the emergence of a new retail institution type. To compete with this
new retail institution type, the existing retail institution type must adjust its characteristics and
ultimately will return back near its original position, but on a higher level than before the wheel
started, or is forced out of business. The results from the South Korean retail data partially
supported this spiral evolution in the retail evolution portion of the CREM (see Figure 6.1). In
the results, several items in the data indicated that the retail institutions in South Korea have
evolved into institutions with features of more mature institution types or higher levels of their
original type; however, the pattern was not as cyclic nor as steady as predicted in the CREM.
As shown in the department store and discount store sections of the results, sales per
store, profit, and operating cost did not continually increase as the CREM proposed. Instead, the
data showed both positive and negative changes, which corresponded in time to major changes in
the environmental influences. For example, department stores entered the South Korean retail
market as a mature retail institution type, and began immediately to experience the maturing
process of an evolving retail institution type. The department store, as a mature retail institution
type, showed changes that seemed to be initiated by social/political events (e.g., 88 Olympics),
and passed quickly into the vulnerable phase where it was negatively affected by the high level
of competition from the new retail institution type of the discount store. As a result, the sales and
profit dropped and operating cost decreased as well. The spiral for R1 is partially supported (see
the dash and dots circles in Figure 6.1)
Discount stores were also introduced into the South Korean market as a mature retail
institution type. For discount stores, the economic crisis was correlated with an initial peak in the
growth rate of sales, which was followed by a drop in sales rate during the initial consumer
recovery from the economic crisis. Again, the spiral evolution of this retail type seemed to be
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compressed in correspondence with the rapid importation of the retail institution type at the peak
of the economic crisis, which resulted in fluctuations of sales, profit and operating costs.
Discount stores showed many of the same fluctuations in the data as department stores, which
had a considerably longer lifecycle in South Korea (i.e., department stores-more than 40 years,
discount stores-less than 10 years). Department stores continuously showed an increase in sales
and operating costs until 1988. This point of change was almost 30 years after their importation,
when a social event (i.e., 88 Olympics) affected their success. If discount stores followed this
trend, they would have had continuous sales success until 2020; however, the sales and operating
costs reacted at the same time as when department stores had fluctuations. The R2 spiral was also
partially supported (see the dash and dots circles in Figure 6.1).
The major measurements to evaluate the phases of the spiral evolution and the
progression of a retail institution type were predicted to the changes in operational costs of labor
and promotions. However, another finding that contrasts to the original CREM is that labor cost
and promotion costs were not the major factor related to the increases in operating costs. As
shown in the data on South Korean retailing, regardless of the fluctuations of operating costs,
labor and promotion costs appeared to be controlled independently of operating costs, instead
perhaps by environmental influences. For example, even though operating costs in discount
stores increased in 1997, the labor cost was reduced by 2.0% compared to the previous year.
Reducing the labor cost seemed to be the first action that stores took to reduce operating costs in
reaction to the economic crisis. Also, in 2001, despite the increase in operating costs, a high
unemployment rate helped discount stores to reduce the labor cost. In another contrast to the
prediction in the CREM for adjustment of operating costs, promotion costs decreased when a
retail institution type achieved the sales success, probably because management thought that high
promotion efforts were not necessary. However, when a retail institution (i.e., discount stores)
started losing its competitiveness as it matured, the promotion cost increased, which is consistent
with the CREM.
In examination of measurement indicating spiraling growth for retail institution types
(i.e., sales, profit, and operating costs), the trend of retail evolution seems to be a repetition of
valleys and peaks, and the scale of these rhythmic changes may vary. The data from department
stores show that sales volume continuously increased until environmental influences interrupted
their growth. The sales volume decreased by the effect of negative environments but when
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environments were a positive influence, the sales volume recovered. Similar trends but with
different influences affected the discount stores. Therefore, rather than a spiral evolution, retail
institutions are described as evolving with repetitive valleys and peaks cycles in terms of dollar
scale.
Multiple Endings of Spiral Evolution within One Type
In addition to the patterns of the spiral evolution being different from the predictions, the
final phase of the spiral evolution was found to result in multiple endings within one retail
institution type. The data on department stores indicated that within one retail institution type,
department stores showed several different endings of the spiral evolution, instead of the one
ending that was predicted in the CREM. When considering a number of the variables used to
measure the spiral evolution, some department stores took an extreme side of store/product
classification scheme within the institution type, in upgrading their store/product attributes, and
improving management and marketing. Therefore, this first type of department stores returned to
the spiral position that was a higher level than before the wheel started, as predicted. In a second
spiral ending, some department stores downgraded their store/product attributes, such as prices,
especially in correspondence to the negative aspects of the economic crisis, which occurred as
these stores were aging (i.e., vulnerable phase). Even though these department stores have a
higher level of operating systems and skills than before their wheel started, the product price
actually dropped below that of their original position. Thus, spiral evolution can move higher or
lower than the original position depending on the intervening variables. In a third ending of the
spiral evolution, some department stores changed their retail type by opening a different format
of stores, which cannot be explained by the traditional spiral evolution because these stores were
neither vertically upgraded nor downgraded. They just horizontally broadened their business.
Finally, some department stores stayed at the original position. In other words, they did not
respond to changing environments or could not afford to adjust. Many bankruptcies of those
stores were identified, as discussed in the department store section. Therefore, the spiral
evolution has several options regarding the position to which a retail institution returns, and the
findings provide partial support for the spirals of retail institution type (see Figure 6.1).
Discount stores showed similar patterns of spiral change as department stores in the
upgrading their characteristics. In 2001, discount stores in South Korea started experiencing a
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decrease in sales in correspondence to the recovering economy. Based on the original CREM,
discount stores should have been entering the vulnerable phase as indicated by decreasing sales;
however, no official statistics of bankruptcies of discount store are published. Instead, in the
post-crisis period, they started carrying higher quality and more fashion items than before their
wheel started (i.e., their importation into South Korea); therefore, only one spiral ending was
found in the data for discount store types in contrast with department stores. Discount stores have
not yet downgraded their prices. The price level that discount stores are providing is lower than
any other retail institution types, so more down-scaled discount stores, as happened with
department stores, are not expected to appear soon but could be possible, but not probable.
Transformation to either another retail type or a multi-format retail type is also not yet shown,
but remains as a possible spiral evolution, considering the findings for the department store
spirals.
Conflict between Department Stores and Discount Stores
The second aspect of the retail evolution portion of the CREM and the second major
theme of the CREM is the conflict between or among retail institution types. Many studies about
South Korea retailing, as discussed in the result section, supported that department stores and
discount stores have been competing each other since 1997. These two retail institution types,
when faced with the challenge of each other, adjusted and modified their characteristics by
combining and imitating the opponent’s store/product attributes. For example, when discount
stores emerged and attracted more consumers, department stores started imitating discount
stores’ attributes, such as carrying low priced products and lowering their product prices. When
department stores regained consumers’ acceptance when the economy started recovering,
discount stores started upgrading their attributes by carrying more fashionable and improved
quality products. This conflict corresponded with the emergence of PBH, which has
characteristics from both discount stores and department stores (e.g., low prices, fashionable
products). Therefore, the conflict between two retail institution types in the CREM was
supported.
A new point, for the conflict aspect of the CREM, found from the data examined about
the conflict between department stores and discount stores in South Korea, was the source of the
competition. In the original CREM, the source of conflict or competition was predicted to be
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from other institution types, as noted in the previous paragraph. In the data, however, evidence
was found that a new retail store started competing with other retail stores within the same retail
institution type as the number of stores significantly increased. As time passed, a retail institution
type lost its competitiveness both between itself and other retail institution types and among
stores of its own type.
In the period of conflict predicted in the CREM, another new retail institution type
emerged. At this point, the first retail institution type started competing not only within its retail
institution type but also with other existing retail institution types including a newly emerged
institution type. In the results, when department stores were a mature but recently introduced
retail institution type, they competed among stores within the type at the beginning and then,
competed with discount stores as another new retail intuition type, and with street stores that
were the traditional retail institution type. When discount stores were a rather mature but newly
introduced retail institution type, they soon competed with the PBH as another new retail
institution type and with traditional retail institution types including street stores, department
stores and the expansion of discount stores. This conflict for discount stores was a more
immediate conflict instead of a long growth conflict because of the compression of the phases of
the spiral and variations in operational development.
The most recent data indicated that the PBH, as an institution type, has problems to
solve such as how to satisfy consumers, which means that PBHs may start evolving by adjusting
their characteristics. At the present, PBHs are trying to keep providing department store level of
service and discount store level of price as they originally aimed. Moreover, they have to
compete with traditional retail institution types including department stores (R1), discount stores
(R2), street stores (R3), and possible variations of the PBH as noted in the new findings. In the
near future, PBH might compete with another new retail institution type (R5) as the original
CREM proposed; however, evidence of this was not found in the data. The original CREM stated
that multiple retail institution types might exist at one time in contrast to previous research
supporting only two simultaneous types. The multiple type concept was supported in the South
Korean retail data; however, the exact characteristics of the third or additional types was not as
expected. R3 is also marked in Figure 6.1 as partially supported.
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Influences
The second portion of the CREM was the influence portion. This portion of retail
influences included both environmental influences and consumer influences, and covered the
third major theme of the model. Both parts of this portion were confirmed in the data with some
modifications including two relationships not supported.
Environmental Influences
A direct relationship between environmental influences and the emergence of a new
retail institution type was predicted by the CREM and the results supported the relationship. In
addition, environmental influences directly and indirectly affected the evolution of existing and
new retail institutions. Examples of many of the variables predicted as influences were found in
the data. For an example of a social environment, increasing city population and South Korean
consumers’ shopping preference in a metropolitan area were correlated initially with the success
of department stores; however, when consumers experienced many problems with a city life
(e.g., traffic congestion, parking problem), they started moving to suburban areas. Discount
stores adjusted their location more quickly than department stores by opening stores in suburban
areas whose population increased rapidly. This example showed that the social environment
directly correlated with the retail operation, such as location. As an example of the economic
environment, due to the economic crisis, the unemployment rate increased. Accordingly,
department stores and discount stores were able to reduce labor cost because supply was much
higher than demand in the labor market. People worked for less salary than before the economic
crisis. This economic environment appeared to help the operation of retail institutions. In
addition to labor cost, that data showed that the economic environment ultimately influenced
product prices, taxes, and sales.
The environmental influences were both direct and indirect, in contrast to the prediction
of the CREM, and occurred at the same time as other environmental forces within the CREM. At
the same time as the economic crisis, advanced technology, such as POS system and mass media,
was installed in stores and helped managers to run stores more efficiently and effectively;
however, technology adoption increased operating cost. At the same time, because the operating
systems had developed and many automatic systems became available, stores could reduce the
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number of laborers, which reduced operating cost; therefore, technological environment altered
the retail evolution as decreasing or increasing operating costs. The data also indicated that other
environmental influences might have more impact on the retail operation than the technology
environment as shown when regardless of increasing technology adoption and its cost, operating
costs and sales decreased.
The legal environment allowed foreign discounters to open business in the South Korean
market and ultimately increased competition. This increased competition urged domestic
discount stores to offer more attractive store/product attributes and to adopt advanced
management systems and skills to compete with foreign discount stores. Therefore, the legal
environment directly affected competition among retail institution types by allowing a new retail
institution to open a business and providing a base for a new evolution. On the other hand, the
legal restriction prevented foreign department stores from opening their business in South Korea
to protect domestic department stores, which helped not to increase competition. Therefore, a
new relationship between the environmental influences and the conflict is added (a in Figure
6.1).
As confirmed in the data, environmental influences appeared to be intervening
continuously during the spiral evolution of department stores and discount stores because
environmental influences are continuously changing as time passes and have affected each phase
of evolution process (b and c in Figure 6.1). The influences and resulting changes were more
continuous than in phases as predicted previously. These continuously changing environments
corresponded to the emergence of PBH, which was predicted in the CREM. In addition, a new
reverse relationship from the PBH to environmental influences was found from the data. Because
the PBH became one of the most popular tourism sites, the South Korean government designated
the DDM area as a national tourism area. This governmental support affected the operation of the
PBH. The PBH needed to change their characteristics, as mentioned in the previous section, to
adjust to this political/legal environmental change so that they could fully exploit the
environment to accelerate its sales. Therefore, the success of the PBH encouraged the
government to regulate their policy (d in Figure 6.1), and a new regulation affected the operation
of the PBH.
Meanwhile, the direct relationship between environmental influences and consumers’
preference for store/product attributes, as shown in the CREM (see Figure 4.1), was not found.
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Instead, environmental influences appeared to have affected directly consumers’ demographics
(e in Figure 6.1). For example, the economic environment changed consumers’ income and job
status. The economic crisis reduced consumers’ household income and made consumers
unemployed. In addition, the social environment affected consumers’ residence area (i.e.,
metropolitan area, suburban area). In turn, these changes in demographics correlated with
changes in consumers’ shopping orientation, as proposed in the original CREM. Changed
shopping orientation seemed to have altered previous consumers’ preference for store/product
attributes. This influence process and relationships among demographics, shopping orientation
and consumers’ preference for store/product attributes are further explained in the next section.
Another direct relationship was found between environmental influences and
consumers’ shopping orientation (f in Figure 6.1), which originally was not predicted in the
CREM. For example, increasing car ownership and the high accessibility of communication
media corresponded with changes in consumers’ shopping orientation. With these changes in
technology, consumers could more easily access department stores located in a center business
district and discount stores located in suburban areas. Based on their car ownership, consumers
started looking for shopping locations that were more convenient. Department stores effectively
used mass media to reach more consumers as media became a part of consumers’ lives and
helped consumers’ purchase decision. Mass media also helped discount stores to reduce the
number of salespersons because consumers were able to search more information through media
and became more knowledgeable in their purchase. In summary of these findings, environmental
influences directly affected the emergence, evolution and conflict of retail institutions; and
consumers’ demographics and shopping orientation. They were reversibly affected by a new
retail institution type. A direct relationship with consumers’ preference was not found.
Consumer Influences
As indicated in the results, the data show that consumers experienced many changes in
their demographics, and, as predicted by the CREM, these changes seemed to have influenced
their shopping orientation. For example, as consumers’ household income decreased with the
economic crisis, they became price sensitive. This price conscious shopping behavior was seen
in the data as affecting their previous preference for store/product attributes. Before the
economic crisis, consumers were concerned about product quality and fashion and preferred
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department stores in a booming economy; however, after the economic crisis, they re-prioritized
price to be the first store/product attribute, as exhibited by the change in their loyalty from highly
recognized brand products to a store that provides lower prices regardless of brand names. The
store/product attributes of discount stores satisfied these consumers’ needs and wants for price,
until the economy started recovering. The improving economy perhaps allowed consumers to
return to their shopping behavior before the economic crisis, which was to be quality and
fashion-conscious. However, even though the economy was recovering, uncertainty about the
future of the nation’s economy was described in previous studies of South Korean consumers as
restraining consumers from spending as much as before the economic crisis. Although
consumers were forced to accept lower priced goods, the South Korean consumer has
traditionally wanted high quality brand name products; therefore, consumers wanted more
quality and fashionable items than those provided by discount stores with low prices.
This preference for store/product attributes became the base of the emergence of PBH.
The results showed that the changed preference for consumers provided part of the justification
for importation of discount stores and the emergence of PBH. This finding supported the direct
influence from consumers’ preference to an emergence of a new retail institution type; therefore,
changes in consumers’ demographics potentially and temporarily altered consumers’ shopping
orientations. In turn, these changed shopping orientation affected consumers’ preference for
store/product attributes, which directly influenced the emergence of a new retail institution as
proposed in the CREM. Although the influence from product/situation to shopping orientation
was proposed in the CREM, this relationship was not found, which is shown with a circle with
Xs inside the demographic circle in the revised CREM (see Figure 6.1). On the other hand, rather
than a cause that influenced shopping orientation, the product/situation was the result of changes
in shopping orientation. The data showed that, after the economic crisis, consumers changed
their shopping orientation as mentioned before, and they reduced their spending on apparel
products and leisure.
As noted in the previous evolution sections and in confirmation of the CREM,
department stores and discount stores started modifying their characteristics, in reaction to the
competition of other retail institution types. In addition, evidence was found in the data that these
changes might also have been based on changing consumers’ preference. For example,
department stores reduced product prices, and discount stores started carrying more quality and
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fashionable items while they were still evolving in the vulnerable phase. These changes
correlated in dates with the changes in consumer characteristics, which could indicate that
consumers’ preference affected not only the emergence of a new retail institution but also the
evolution of existing retail institutions (see the new relationships indicated by b and c in Figure
6.1). These findings provided a support that the changing preferences of consumers were both
the basis of the emergence of a new retail institution type as shown in the CREM and remained
as an influence in the revised CREM, and also influenced the evolution of other institution types.
To continue confirming the process of influence and evolution, the findings showed that
the current consumers’ preference for store/product attributes, which department stores and
discount stores needed to meet, were reestablished based on the store/product attributes of PBH
(i.e., low prices, higher quality, more fashionable items). Department stores and discount stores
needed to change their attributes because consumers were looking for low prices and waited for
markdowns in department stores before buying, and were looking for quality and fashion in
discount stores. Therefore, one possible assumption is that consumers were trying to find their
preferred store/product attributes, which were reestablished from the PBH, in department stores
and in discount stores. Interpreting the data using the relationships of the CREM, the
store/product attributes of PBH became the consumers’ preference for store/product attributes,
and this changed preference made department stores and discount stores change their
characteristics (i.e., evolution). This interpretation of the data supported the influence from R4 to
consumers’ preference for store/product attributes (d in Figure 6.1) and the influence from
consumers’ preference for store/product attributes to R1 and R2 (b and c in Figure 6.1) that is
newly added in the revised CREM. In addition, department stores and discount stores conflicted
based on consumers’ preference for store/product attributes. Because consumers preferred prices
of discount stores, department stores competed with discount stores by reducing prices, and
discount stores improved products to compete with department stores because consumers
preferred quality and fashionable items of department stores. Therefore, consumers’ preference
for store/product attributes contributed to the conflict between two retail institution types. A new
relationship is added (a in Figure 6.1). Based on all findings from the data, the CREM was
revised and the final CREM is proposed.
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Final Combined Retail Evolution Model
A final CREM was developed based on the revisions and confirmations found in the data
(see Figure 6.2). New relationships were placed in the model, partially supported relationships
and processes were indicated as such, and the unsupported relationships were removed. Some
conclusions can be made from the final CREM. Because of the lack of completeness observed in
the CREM through the comparative analysis, this revised model fulfilled the final objective,
Objective 4.
For the spiral evolution of retail institution types, specifically department stores and
discount stores, three main conclusions can be made from these results with implications for the
final CREM. First, for South Korea, the retail institution types of the department store and the
discount store were imported into the market as mature stores and did not experience the features
predicted to belong to a new or entry phase retail institution type. Second, all types of indicators
did not continuously increase but fluctuated whenever environmental influences appeared to
interrupt the growth. Third, the fluctuations were shown not only in the vulnerable phase, but
also during the mature phase. In the final CREM, this is shown as an irregular spiral evolution
(see circles with dashes and dots in Figure 6.2). One reason for the variance in spiral evolution,
which was different from that in Western countries, might be that discount stores and department
stores were imported from Western countries as mature retail types, whose operating cost had
already reached a peak. They began exhibiting further maturity growth early, skipping the entry
phase, and appearing to enter quickly into the vulnerable phase. Likewise, the PBH was created
or originated in South Korea. If the PBH is imported to other countries, the PBH is predicted
based on the final CREM to meet the trade-up phase (i.e., mature phase) sooner than the PBH did
in South Korea.
The variation may also be explained with environmental influences discussed in this
study, which can be unique from one country to the other. Environmental influences
continuously affected retail institutions and made indicators fluctuate. However, this fluctuation
may be different because of the uniqueness of environments in a country. The final CREM was
also adjusted based on this result of multiple spiral directions. A newly added symbol in the
bottom of the spiral expresses four different endings of spiral evolution: (1) upgrade, (2) stay the
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R1 = retail institution types
Retail Evolution Influences
Figure 6.2. Final Combined Retail Evolution Model
R1 R2
R4 R5
R6
Environmental influences
- Consumer’s preference for store/product attributes - Product - Situation
Environmental influences
- Consumer’s preference for store/product attributes - Product - Situation
Shopping orientation
R3
Shopping orientation
R1
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First Wheel
Second Wheel
Different Endings of Spiral Evolution Irregular Spiral Evolution
Demographics
Demographics
same and eventually go out of business, (3) downgrade, or (4) transfer to a different type of retail
institution (see Figure 6.2). Only the upgrading option was predicted in the original CREM, but
the data showed that department stores took all four different options for spiral ending, and
although other retail institution types took only one or none of spiral ending options yet, other
options are still remaining as their future spiral endings.
Evidence was found that environmental influences could both negatively and positively
affect retail evolution, depending on the type of environments and the characteristics of the retail
institution type. A positive environment to one retail institution type could be a negative
environment to another retail institution type depending on the characteristics of that retail
institution, and, within a same environment type, the impact was different based on the method
of response by retail institution types. Depending on environments and retailers’ reaction to the
environments, the institution type’s spiral evolution pattern and lifecycle were decided.
Normally, retail institutions respond to environments, which are not controllable by their
managers, by adjusting their attributes, which are controllable. However, the result showed that
retail institutions could change, if not control, environments including consumers by providing
attractive attributes (i.e., the reverse relationships from a new retail institution type to
environmental influences and consumers in the final CREM) (see Figure 6.2). In the findings,
attractive attributes increased consumers’ store patronage of a new retail institution type, which
ultimately manipulated environmental influences. This relationship was supported even though
few researchers previously showed an interest in this relationship.
As found from the data, consumers were affected by environmental influences and
attributes of a new retail institution type. Consumers had a set of preferred store/product
attributes; however, priority of these attributes appeared to be flexible based on what resources
were currently available, such as information, income, technology, and low-priced but
fashionable products. As shown from the data in this study, consumers could also be manipulated
by retail institutions. If a retailer provides and meets consumers’ preferred attributes, a retailer
can alter consumers’ change, whether or not environmental changes affect consumers. This
relationship is also shown in the final CREM as an arrow from R4 to consumers’ preference for
store/product attributes (see Figure 6.2).
In a change in the influence direction, the product/situation was found to be not the
cause but the result of changes in shopping orientation. The data showed that, after the economic
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crisis, consumers reduced their spending on apparel products and leisure an indication of a
changed shopping orientation. This influence is shown in the final CREM by moving
product/situation from the demographic circle to the consumers’ preference for store/product
attribute circle (see Figure 6.2).
In summary, the CREM, although lacking completeness for all aspects of South Korean
retailing, was partially supported through the constant comparison analysis with the data. With
modifications, the retail portion of the CREM was supported, including the spiral evolution and
the conflict among retail institution types. Environmental influences affected consumers’
demographics and shopping orientation, which ultimately affected consumers’ preference for
store/product attributes. Both environmental influences and consumers’ preference for
store/product attributes had a reciprocal relationship with a new retail institution type. In
addition, these two variables influenced the evolution and conflict of existing retail institution
types. Two relationships were not supported by the results. Instead of a direct relationship
between environmental influences and consumers’ preference for store/product attributes,
indirect relationships through consumers’ demographics and shopping orientation were found,
and a relationship between products/situation and shopping orientation was not found. Based on
the results, the CREM was revised as shown in the Figure 6.1, and the final CREM appears as
shown in the Figure 6.2.
The final CREM was evaluated by the criteria developed by Beach (1999): purpose
fulfillment, credibility, usefulness, and possibility of development. The CREM met these four
criteria. To fulfill the purposes of theory, a model should be able to organize observations,
explain phenomena, and generate new ideas and research. The CREM organized statistic data
and explained the retail evolution phenomena in South Korea. Credibility can be achieved by
controlling the process of development when forming the model. The data analysis and
comparative process was done by a controlled process with documentation and checking
procedures. Usefulness of a model is judged in part by the variety of contexts in which it can be
used. The CREM was built with the information from retail evolution studies based on retailing
in Western countries, primarily the United States, and was tested with the data from South
Korea. Most of the relationships, variables and the primary themes were supported. In addition
as discussed in implications, the final CREM provides a way to predict the process of retail
evolution. Finally, the CREM provides room for improvement whenever unexpected influences,
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variables, and relationships are found, as shown in the changes from the original CREM, the
revised CREM and the final CREM. For example, the CREM generated new ideas, which were
not found in previous studies, and these were easily placed in the final version.
Summary and Conclusions
According to the data analysis, the CREM was partially supported and refined.
Regarding the first theme of patterns of spiral change, all types of indicators (e.g., sales, profit,
market share, operating cost) did not continuously increase as retail institutions mature, which
was in contrast to the CREM, but fluctuated whenever environmental influences interrupted the
retail growth. In the vulnerable phase, four paths, taken by retail institutions for a spiral ending,
were found: (1) upgrade, (2) stay the same and eventually go out of business, (3) downgrade, and
(4) transfer to a different type of retail institution. The second major theme of the effects of
conflict in the CREM was supported. Additional evidence was found that a new retail store also
starts competing with other retail stores within the same retail institution type as the number of
stores significantly increases. As time passes, this new retail institution type starts competing
with its own type, other traditional retail institution types, and a new retail institution type.
For the third major theme of influences, which were proposed to affect the emergence of
a new retail institution type in the CREM, environmental influences included social,
technological, legal, economical and cultural/geographical conditions. These environmental
influences affected not only the emergence of a new retail institution type but also the conflict
among retail institution types and the evolution portion. These new findings were added in the
CREM. In addition, the evidence found that a new retail institution in South Korea influenced
retail environments; therefore, a reciprocal relationship was found between environmental
influences and a new retail institution type, and added to the CREM. A direct relationship
between environmental influences and consumers’ preference for store/product attributes, as
proposed in the CREM, was not found. Instead, environmental influences directly affected
consumers’ demographics and shopping orientation. The CREM was revised to reflect these new
findings and the changes to previous relationships.
Further describing the consumer influence variables, the data showed that changes in
consumers’ demographics altered consumers’ shopping orientations, and in turn, these changed
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shopping orientation affected consumers’ preference for store/product attributes, which directly
influenced the emergence of a new retail institution. Therefore, the proposition in the CREM was
supported that consumers have an influence on the emergence of a new retail institution. In
addition, new relationships were found. The result supported that consumers’ preference for
store/product attributes originated the conflict between two retail institution types and influenced
the evolution of existing retail institutions. In addition, the store/product attributes of a new retail
institution type became the consumers’ preferred store/product attributes, and this change in
preferences made existing retail institution types change their characteristics. Therefore, a
reciprocal relationship between consumers’ preferred store/product attributes and a new retail
institution type was found. The CREM was revised based on these findings and the final CREM
was proposed.
Implications
This study could provide a framework for retail businesses as they strive to gain a
competitive advantage over other retail institution types. The CREM was developed using a
synthesis of previous retail evolution studies and analysis with statistical data from a nonwestern
country for quantification of the model. Differences were found between the CREM that was
proposed based on the primarily Western theories and previous research and the data from South
Korea. Retail evolution in other nonwestern countries may also be found to have similar
characteristics as proposed in the CREM: (a) the evolution process is shortened, (b) cyclic phases
are not the three clear phases, and (c) influences may be more interwoven than previously
known. These findings may imply that the retail evolution process is geographically diverse or
that the process is evolving with time. Researchers should not automatically assume that one of
the traditional or previous models can be readily applied to any retail evolution process. Some
variation may exist when some variables or relationships in the final CREM are not proven or
not supported in other retail institution types and in other countries; however, the final CREM
covered all major variables and relationships from the previous research and added new variables
and relationships from the analysis of this study. The CREM should be usable as model that
could explain more various retail evolution situations then any of the previous more narrowly
focused models.
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For retail businesses, especially in nonwestern countries, the relationships found in this
study indicate that retailers in South Korea could examine ways to exploit their environmental
changes, predict consumers’ changes depending on these environmental influences, and gain
competitive advantage over other retail businesses. Using this study could provide a more
authentic prediction about the direction of evolution in terms of retail offerings. The relationships
in the CREM predict that competitive advantages can be achieved to provide benefits to
customers. In other words for retailers, this study provides direction to the ultimate goal of retail
operation, which is to maximize the value of attributes that consumers prefer. Because the
maximization of the value could alter consumers’ changes in favor of a specific retail institution,
retailers need to put an effort into negotiations among values of attributes to produce maximum
value of each attribute based on the cost efficiency and potential profit.
Finally, the CREM provides information about a retailer’s control over the future of
retailing, by predicting the emergence and characteristics of a new retail institution type through
analyzing current retail institution types. The final CREM includes predictions about the future
possibility of a new retail institution type. Using the information from the CREM, a future
scenario is predicted in the following example. If a retailer chooses a path that adjusts well, the
store type could extend its lifecycle; however, because the lifecycle of a retail institution appears
to becoming shorter than noted in previous research, a retailer should respond quickly. If a
retailer decides to stay static and tries to avoid evolution, the store type might serve a niche
market, especially consumers who prefer the traditional retail type as they are accustomed to
finding it, but that market size becomes smaller. Even though a retail institution type does not
change or evolve, their market will be reduced; therefore, the only viable choice for retailers is to
take any ending option of the spiral evolution, except to stay static or without change. Knowing
consumers is the core of a retail operation; therefore, knowing the reason for consumer change is
to be able to predict the direction of retail changes (i.e., evolution) that provide a competitive
advantage and ultimately increase store patronage.
Recommendations for Future Research
This study provides many possible research topics. As a first topic, an explanation is
needed whether a retail institution enters into the vulnerable phase because its sales volume starts
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decreasing, or sales volume decreases because a retail institution enters into the vulnerable
phase. The data did not clearly illuminate the cause and effect relationship. As a second topic,
the precise criteria/definition of maturation is needed. Future research can generate better criteria
and measurement schemes to indicate more precisely, what is maturation of a retail institution
type. As a third topic, future researchers can examine the relationships between a new retail
institution type and the consumers’ shopping orientation, and between the product/situation
variable and the consumers’ shopping orientation, which were not confirmed through the data in
this study. As a fourth topic of study, the CREM is tested in only one country in this study, so
future researchers can test other or multiple countries, which perhaps have different retail
environments. This stream of research could lead to finding other significant variables and
relationships, and to increasing generalizability. As a fifth topic, employing different statistical
method can be used, such as Chi-test or t-test, to examine potential significance between
numbers from the data. Lastly, in the near future, the PBH might begin to compete with another
new retail institution type as the final CREM proposed. Although evidence of this event was not
found in the data, longitudinal studies are needed to verify the path of further retail evolution and
to increase validity and reliability of the CREM.